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Hurricane adds to reinsurers’ capital drain in Q3: Morgan Stanley

10th October 2022 - Author: Kassandra Jimenez-Sanchez

Analysts at Morgan Stanley have stated that this year’s third quarter will be challenging, especially as Hurricane Ian has highly contributed to capital drain.

morgan-stanley-logoAccording to analysts Q3 2022 started off as a quiet quarter from a catastrophe perspective in the US, with no land-falling hurricanes through the first two months. This ended with Hurricane Ian, whose estimated insured losses place it as the second costliest hurricane, after Katrina.

In its latest report, Hurricane Ian Estimates Have Wide Range; A Few Notable Events Internationally, Morgan Stanley has noted that the higher end of these estimates only seems likely should a certain number of factors line up.

It said: “Outside the U.S., there were a number of medium-to-large sized events, including Fiona, Namadol, and French Hailstorms, each in the low to mid billions of insured losses. We expect reinsurers as well as those internationally exposed to see a larger share of the quarter’s cat load.

“Excluding cats, our EPS estimate revisions were relatively minor. On average, we estimate ~4.4% operating ROE and -10.2% sequential BVPS decline in the quarter (MTM & Cats). For P&C brokers, we estimate average organic growth of +6.3% (down from +6.5% in 2Q22).”

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According to analysts, in a quarter already bruised by significant MTM write- downs, losses caused by Hurricane Ian have served as a “double-whammy hit” to reinsurer’s equity.

Analysts said: “At the recent reinsurance rendezvous conference in Monte Carlo, we heard a clear bifurcated message: some reinsurers taking a pause on property cat business to pursue diversification in other markets (primary insurance, casualty reinsurance), while other reinsurers saw the current prop cat market as attractive enough to pursue (see our note here).

“The equity hit in 3Q will bring that differentiating strategy more clearly in focus, but regardless which way any one particular reinsurer leans, we think as a group, reinsurers are in the driver’s seat as we enter 2023.”

Regarding commercial lines, Morgan Stanley expects a continued pricing deceleration for most of them, but given some carriers saw a positive inflection in 2Q coupled with continued pressure from inflation, positive pricing trajectory may continue for a few, the firm noted.

It said: “While margins remain healthy, we expect to see pressure as the gap between rate vs. trend narrows.

Analysts added: “Seeing similar focus on personal auto, with expectations for majority of players to see greater rate increases in 3Q and 2H more generally than 1H in order to catch-up with elevated frequency and severity. However, pricing for most has yet to earn in and as such we expect continued margin pressure in the near-term.”

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