A discussion with Sven Althoff, Member of the Executive Board at Hannover Re, has left analysts at JP Morgan confident that reinsurance pricing should materially improve into next year, with positive dynamics anticipated in all classes of business.
“We believe the call supported our argument that reinsurance pricing should materially improve into 2023,” say analysts.
Hannover Re, one of Europe’s big four reinsurers, remains one of JP Morgan’s favourite ways to play the reinsurance cycle.
In early November, the firm reported group net income growth of 1.7% to €871 million for the first nine months of 2022, despite recording net large losses above budget of €1.484 billion for the period.
On catastrophe losses, the firm told JP Morgan that its track record on loss assumptions is strong, and that any overshoot on large losses in more recent times tends to come from man-made events rather than natural catastrophes.
Further, the company tends to set it reserves towards the upper end of the best estimate reserving range for cat events, which enables it to absorb any impacts from inflation, which have been on the rise in recent times.
One thing that’s abundantly clear from the call, is that reinsurance pricing dynamics are set to improve, with Hannover Re likening the current market to ones seen post-2001 or 2005, with the main difference being that this time there’s no new capital flooding the market with incumbent players set to renew the business.
At the same time, the mixed performance experienced by alternative capital investors in recent years, coupled with the fact other asset classes now appear more attractive, means it is unlikely that capital markets investors will return to the market in the near-term.
For reinsurers, what is promising is the fact analysts expect pricing dynamics to be positive in all classes of business, with the upturn not just limited to loss-hit lines such as property catastrophe.
“It is difficult to say just how much prices will increase, perhaps not all the way back to 2006 levels but renewals will certainly close the gap,” say analysts. “However prices are expected to increase more than 2022 on a risk adjusted basis.”
As well as improved pricing dynamics, analysts expect retentions to move for primary insurers, noting that buyers will either need to use their budgets to keep retentions at low levels, or raise the top of their coverage to cover the cost of inflation. However, analysts warn that there’s unlikely to be sufficient reinsurance capacity to do both, so decisions will have to be made as to how best approach 2023.
Ultimately, analysts expect higher retentions and a shift towards ‘named perils’ to help increase the ‘miss factor’ for reinsurance firms which in turn should help boost profitability.
Hannover Re is well positioned for the market inflection, says JP Morgan. The company confirmed that it expects its partners to provide retro capacity for 2023 at likely higher prices, but combined with higher reinsurance pricing, the result should see a net positive impact.
“On the topic of recognition of higher profitability, Hannover Re commented that not all of the increases are likely to be seen in earnings in the near term with the company keen to maintain its approach of building buffers in the good times to allow it to produce consistent cross cycle returns,” say analysts.