Bermudian investors’ expectations for reinsurance rate increases at the January renewals may not live up to expectations, although optimism remains for improving casualty reinsurance rates, said Keefe, Bruyette & Woods (KBW) analysts after holding meetings with key re/insurers last week.
KBW said it remains “cautious on the Bermudians” as the initial post-catastrophe pricing “euphoria” wears off and expectations for increases moderate.
“Overall, we recommend that investors stay on the sidelines of the Bermudians until final (probably disappointing) 1/1/18 pricing data comes in, although we expect Market Perform-rated RNR and VR to do the best job of identifying opportunities among the industry’s many moving parts,” said KBW.
Bermudian executives described the renewal season as being “late.”
“Our sense is that firm orders are out for only about 30-40% of expected January 1 renewals, with only about 10% bound. We heard the phrase “Mexican Standoff” more than once,” KBW commented.
Analysts commented that with abundant traditional and alternative capital, and flat, rather than increasing, reinsurance demand, waiting probably favours buyers of protection.
Rate increases are being led by retrocession at an expected 20-24%, followed by loss-impacted U.S. accounts at 15-25%, loss-free U.S. accounts at 3-10%, and international reinsurance which is flat to modestly up.
“Casualty reinsurance pricing sounds better than we expected, and most Bermudians expect limited headwinds from U.S. tax reform,” said KBW.
Multi-year contracts are expected to moderate impact on 2018 results but sustain rate increases over several years.
However, for retrocession, which is forecast to see the biggest rate increases, KBW said the upwards pricing trend could reverse and decrease further if 2018 is catastrophe free.
KBW noted that “several companies said that their decision to buy or sell more retro y/y depends on where pricing ends up; we think potential net demand changes will modestly suppress retro rate increases.”
KBW are optimistic on casualty reinsurance, saying it was the biggest positive takeaway from talks with Bermudian reinsurers on the upcoming renewals.
“Underlying that optimism is the recognition of significantly worsening general and professional liability experience including both frequency and severity that the industry hasn’t yet fully recognized or reported, and experience and expectations definitely vary by company, but we think there was overall agreement about slowly improving casualty reinsurance rate levels,” said KBW.