Investment bank Berenberg remains positive on the outlook for the reinsurance sector in light of improved underlying earnings power on the back of consecutive years of rate increases.
With a continuation of market hardening at the January 1st, 2022, reinsurance renewals, albeit with “increasing fragmentation” between loss-hit and non-loss-hit lines, Berenberg remains positive on the sector for the months ahead.
Prior to 1/1, the investment bank expected mid-to-high single-digit rate rises in loss-affected business and mid-single-digit rate increases for loss-free business.
“Following the early commentary, we believe that these expectations have largely be borne out, with greater risk to the upside than the downside,” say analysts.
While the current rate trend is clearly positive for reinsurers, Berenberg notes that during its discussions with management teams, it became clear that there’s also optimism surrounding further margin expansion once claims inflation, changes in risk perception and interest rates are considered.
Analysts explain that, “This is important as it is the margin expansion that will continue to drive the increases in underlying earnings power that we have witnessed over the last five years.”
Overall, Berenberg sees potential for margin expansion to be in the low single-digit percentage range.
This renewed optimism for improved earnings power, coupled with five consecutive years of rate-on-rate increases, are the reasons Berenberg remains positive on the sector’s outlook.
In fact, Berenberg has highlighted the attractiveness of the reinsurance sector for some time, underpinned by ongoing rate hardening despite primary players being well capitalised.
Analysts attribute this trend to the fact the current hardening market is not a result of capital supply constraints, but more the need for the sector to earn its cost of capital amid the lower for longer interest rate environment, social and cost inflation, and above-average losses from natural disasters.
“We think that this is unique when compared to previous hard- market cycles and is representative of the increased risk aversion that currently characterises the market, which is further heightened by the global pandemic and ongoing economic uncertainty,” say analysts.
Another way the current market differs from previous hardening cycles, according to analysts, is that in the past, reinsurers had to choose between redeploying capital into the business where attractive opportunities exist or returning capital to shareholders. Last year, however, analysts saw both solid top line growth and resilient solvency capital, and this is despite 2021 being one of the costliest catastrophe years on record.
