Pressure on Florida focused reinsurers to cut back exposures is mounting as June 1 property catastrophe reinsurance renewals show continued rate declines as the long-awaited pricing bottom fails to materialise in a market dominated by excess capacity.
Peel Hunt equity analysts have echoed JLT Re’s estimate of a 5.1% rate drop in June renewals, with pricing still falling at a pace similar to the saturated markets of Japan and Europe at renewals earlier this year.
Under these conditions, reinsurers have been cutting back on exposures, and Peel Hunt said its underwriters who took a proactive stance to reduce exposures in previous years, like Lancashire, which are now better placed to sail through the challenging waters compared with players who have just begun to make cuts.
Lancashire was heralded by Peel Hunt analysts as a reinsurer “in a good position to continue to protect its core portfolio and fund special dividends from earnings should the market remain soft or, otherwise, grow into a hard market using its excess capital position.”
The last 11 years without a major hurricane have caused risk adjusted returns to slide below the cost of capital, however, according to Peel Hunt, even a less major loss would be likely to shake up the cycle of decline, as “attritional loss ratios are being eroded, lowering earnings buffers and in some cases making carriers vulnerable to small to medium sized catastrophe events.
“Hence, it might not take a major loss to turn the cycle albeit surplus capacity will cap any hard market at present.”
However, sheer sums of surplus capital in reinsurance make this an unlikely probability.
With the industry drenched in surplus capital, a market turn is not predicted for the near future, unless losses can stabilise the pricing cycle.
Peel Hunt believes it’s Floridian underwriters that have grown their portfolios, either through fronting or ILS, in particular who will come under pressure to shrink their books.
Florida has been a magnet for third-party alternative capital, as the largest ‘peak zone’ for catastrophe risks, its prices are higher than the average of other peak zones throughout Europe and Asia, and with this abundant traditional reinsurance capacity and alternative capital being put to work, although demand “continues to be muted/stable,” Peel Hunt said “excess capacity still dominates.”
“Whilst the property catastrophe reinsurance & retro market has not bottomed out yet, there is further anecdotal evidence that reinsurers are struggling and pricing new business at or below the cost of capital in the ‘hope’ of another benign underwriting year.”
Peel Hunt analysts added that after the 1st July renewals, a broader picture of how these Floridian specific trends compare with reinsurance trends across the U.S. market would become apparent.