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25 May 2023ILS

Arch-Everest tipped to benefit from RenRe-Validus deal

Arch Capital and Everest Re are tipped to be the biggest beneficiaries of the continued hesitance of ILS investors and the  deal between RenaissanceRe and Validus Re, which will remove some property-cat capacity from the market, potentially extending the hard market and dislodging talent.

That is the view of analysts from Jefferies following what they called a field trip to Bermuda during which they met with reinsurers and ILS managers in Bermuda. They said they expect an orderly mid-year renewal, but rates may plateau at year-end depending on primary demand and cat experience. They said ILS capital may remain hesitant for another two to three years.

They said they also see RenRe as a beneficiary as it becomes a top-five reinsurer (by GPW) that should give it greater ability to control pricing and terms.

“The broad sentiment into mid-year renewals among the executives that we met was bullish,” the analysis wrote. “They note 30-40% risk adjusted rate increases and tighter terms in mid-year renewals, even if renewals were more orderly and earlier than 1/1 renewals, as brokers and cedants planned ahead. Quantifying the capital shortfall between supply and demand was an especially controversial question, with almost all participants framing the gap in wildly different ways.”

In terms of the comment on mid-year being “orderly" they noted this is only the case because both buyers and sellers accept that there had been a step change in the required reinsurer return on capital. “This broadly matches the message from brokers, who remarked that while over-lining was taking place where the ROE is adequate, even a modest drop in rate results in a sudden shortfall in capacity.”

The continued: “While there was inevitably considerable discussion around pricing, most people appear to view the shift in terms as especially important. Lifting the attachment point is the most powerful change, followed by moving to named perils only and removing secondary perils. Other terms that are being changed include the hours clause, valuation indexation, shift from $m deductible to % deductible and various exclusions for cyber war and communicable disease.”

The added that changing terms also extends to ILS, where shorter duration contracts (e.g. 6-7 month deals) are increasingly common for distressed carriers, as are forced commutations after 2-3 years. While the margin and risk benefit of these changes is subjective, the benefit is certainly material.

The said there appears to be limited new reinsurance capital entering the market - from new entrants, ILS and incumbents. They cited no evidence yet of a Class of 2023. Furthermore, it may take another 2-3 years for ILS capital to re-enter the market, but rated reinsurer capacity is taking its place while the market remains hard. This further supports the market and likely makes the current elevated levels of pricing sustainable in 2024, they said.

“However, several executives believe that the property reinsurance market may plateau in 1/1/24, particularly if the reinsurance industry can generate mid teen returns or more in 2023. Still, even a clean 2023 will not likely bring back ILS capital in bulk in 2024, as pension funds likely will require 2-3 good years and possibly a lower interest rate environment before deploying more capital to ILS.”




More on this story

News
23 May 2023   The full deal comprises all of AIG’s treaty reinsurance business.
News
30 May 2023   AIG ratings unaffected by $3bn sale to RenaissanceRe.
News
1 June 2023   Ten-year notes will help to fund $3bn Validus purchase.

More on this story

News
23 May 2023   The full deal comprises all of AIG’s treaty reinsurance business.
News
30 May 2023   AIG ratings unaffected by $3bn sale to RenaissanceRe.
News
1 June 2023   Ten-year notes will help to fund $3bn Validus purchase.