KBW: reinsurance pricing expected to harden in 2019

According to analysts at Keefe, Bruyette & Woods (KBW) market participants are expecting steadily rising reinsurance pricing over the course of 2019.

In its latest briefing note KBW said that the hardening conditions reflect declining supply and an expected rise in demand, which could extend into other lines, particularly the retro-dependent Lloyd’s market.

KBW said that its analysts remain “moderately optimistic” about 2019 reinsurance pricing – and hence some Bermudian re/insurers – following recent meetings with numerous underwriters and brokers.

KBW is maintaining its outperform ratings on RenaissanceRe Holdings, which should benefit considerably from better overall catastrophe pricing; Arch Capital Group, which expressed their expectation that market turmoil should present it with at least a few distinctive opportunities; and Third Point Reinsurance, where improved market pricing is expected to accompany its planned diversification into shorter-tailed lines.

January 1 reinsurance renewals’ rates are expected to come in roughly flat or up modestly year on year (other than retro), according to KBW. The January renewals largely comprise European and national US accounts with few or manageable 2018 catastrophe losses, and many January reinsurance renewal quotes were issued in November, preceding both the California wildfire losses and Markel CATCo’s disclosed regulatory inquiries.

Retro pricing is definitely “tighter” and KBW believes there’s a very wide retro rate increase range that could average out at around +15-20 percent, but little retro has been bound to date, particularly for loss-impacted accounts, reflecting 2018 losses, analysts noted. Retro capacity has been hit by losses and collateral has been trapped by late events like the California wildfires. Cedants are increasingly reluctant to release capital prematurely and some significant ILS fund redemptions are – unlike last year – not being replaced by newly raised funds. ILS funds represent an estimated 75 percent of global retro limit, KBW said.

Most executives were therefore cautiously optimistic about the prospects for significant later renewal dates. Both Japanese renewals (typically at April 1) and Florida/Southeastern US renewals should include a higher percentage of loss-impacted accounts (reflecting typhoon Jebi, hurricanes Florence and Michael, and numerous other smaller events, analysts noted. ILS capacity deployed to Japan is expected to remain low, and ILS fund redemptions, trapped capital, and still-growing losses – the hurricane Irma loss creep continues, with similar risk for hurricane Michael and the California wildfires, the report said.

The biggest risk to progressively stronger reinsurance rate increases is the potential for increased capacity, including ILS fund inflows, and there are definitely some examples of current fundraising, KBW said. Stephen Catlin is, for example, reportedly progressing toward raising about $3 billion to establish a new reinsurer, analysts noted. Hamilton is looking for ILS investors, and RenaissanceRe just announced a $600 million - $1 billion joint venture targeting very high-layer North American catastrophe risk currently underwritten by a small number of highly rated reinsurers.

KBW noted that many ILS investors were disappointed by both the size of actual 2018 rate increases and by actual 2018 catastrophe losses, and that overall negotiations for ILS funds are slower than in the past. KBW analysts expect reinsurance rates to rise at the later renewals, but analysts don’t view potential capital raises as a dismissable or remote risk

Rate increases on other reinsurance lines don’t seem to be accelerating much from low single-digit levels, although ceding commissions are coming down a little, according to KBW. At the same time, rising retro rates are likely to ripple through the Lloyd’s market. Lloyd’s insurers – who as a group depend on retro protection to determine their realistic disaster scenario exposure – are reportedly paying higher rates to maintain consistent programmes year on year instead of buying less protection, analysts noted. Franchise Board business plan reviews (in March) will probably uncover less free capacity than was originally expected, which is likely translating into a combination of reduced writings and/or bigger rate increases for other lines of business.

Franchise Board discipline is seen as driving better pricing at Lloyd’s and market participants expect that trend to persist in 2019, KBW suggested. ILS investors retain some interest in assuming some casualty risk, but longer tails and the increased need for invested asset management still implies relatively slow growth, the report noted.