With Munich Re estimating a 7.4% fall in reinsurance capital supply, and a significant proportion of outstanding alternative capital already encumbered by losses, analysts at Jefferies believe the expected hard market could last multiple years.
Though alternative capital remains above $90 billion, analysts note how a material proportion is now locked up in side pockets and set aside to pay for catastrophe claims incurred since the second half of 2017.
Consequently, in addition to a 7.4% decline, the unencumbered industry capital base is likely to be materially lower.
In Jefferies’ view, the reinsurance market is increasingly primed for a sustained hard market, similar to that seen over between 2000 and 2003.
Looking to 2020, analysts see a similar range of inflationary factors to those that occurred during that three year period.
Reserves are now often found to be deficient, catastrophe losses have been high since H217, the pandemic has created unmodelled losses in non-life and financial markets have been volatile.
If so, it seems possible to analysts that this long awaited hard market turn could last for multiple years, as was the case between 2000 and 2003.
Amidst this market backdrop, Jefferies have a preference for those reinsurers that are growing into the cycle.
This leads analysts to reiterate their buy recommendations for Hannover Re, Munich Re, Hiscox and Beazley.
Amongst these, the relative balance sheet strength of Hannover Re and Munich Re reinforces Jefferies’ conviction that these offer the most growth and the least risk.
In the case of SCOR and Swiss Re, it’s believed stock specific risks offset their discounted valuations.
