With the industry now entering a hard market cycle, analysts at Wells Fargo Securities believe pricing conditions will lead to better margins for reinsurers, as well as higher premium growth, a stronger ROE profile, and higher valuation multiples.
Looking at historical examples, analysts noted that reinsurer underlying loss ratios improved by approximately 8% in 2006 following global cat price increases of 37%.
But margins were mostly flat in 2012 when compared to 2011 despite the hardening market, as price increases of 10% were just enough to maintain reinsurer return profiles.
Wells Fargo therefore believes the industry will see outsized margin improvement if it can achieve price increases of more than 20% over the next two years, and slight improvements or consistent performance if price increases are around the 10% mark.
According to Hyperion X data, reinsurance rates went up 26% during the Florida renewals, and Wells Fargo believes this has set the stage for even stronger rates in 2021.
RenRe has similarly said that it expects the market to be as strong as it was after 9/11, which implies rates could be up by a good amount more than 10%, with the possibility of an active hurricane likely to add to this dynamic.
“Covid-19 will help drive the reinsurance momentum into 2021,” Well Fargo stated. “Given the high level of industry losses observed in 2017-2020 (Hurricanes Harvey, Irma, and Maria, Typhoon Jebi, and now Covid-19 losses), we expect to see at least double digit pricing increases as we move through the end of 2020 and we expect these rate increases to persist into 2021. Our sense is that this pricing cycle will be most similar to the one post 9/11.”
