Analysts at Berenberg have said that “there is a lot for reinsurers and London Market participants to be excited about,” despite the challenges of a difficult macro environment.
In a new report, the firm notes that pricing was even better than expected when companies reported at Q1 and the market is expected to remain hard, especially in certain lines where capacity continues to be constrained, such as aviation and cyber.
Natural catastrophes (nat cats) continue to divide opinion, with some companies such as Lancashire and Hannover Re pushing the longer-term profitability of the line, but with others like Hiscox and SCOR opting to remain at best agnostic about its rate adequacy.
Berenberg highlights that the benign nat cat development in Q2 is also a positive for the H1 numbers assuming there are no big losses between now and quarter end.
And furthermore, COVID-19 excess mortality losses in life and health (L&H) reinsurance should be much diminished in Q2 as the data has vastly improved since March.
On investment income, the shorter duration portfolios of the London market names should mean that investment returns will benefit from the rising rates relatively quickly.
And on an economic perspective, rising interest rates are also positive for solvency which should continue to be robust at the H1 2022 results.
In terms of areas to exercise caution, Berenberg notes that on the whole there have been no further developments since Q1 2022 on the insured losses from the Ukraine war, which is an ongoing issue for the sector.
The drought in Brazil also continues, which is likely to be a headwind for SCOR’s Q2 results, while there may also be some revisions to loss estimates from prior large claims due to the higher claims inflation in the system.
Unrealised gains in the balance sheet have diminished due to rising rates, which reduce the ability of reinsurers to manage earnings, Berenberg points out, although higher reinvestment rates mean this should be partly offset in earnings.
