Analysts at Morgan Stanley have said they expect to see the reinsurance industry’s earnings quality improve alongside continued pricing increases.
Based on its conversation with reinsurers around the virtual Monte Carlo event this year, the firm said that rate momentum will likely continue throughout 2021 and potentially beyond.
And while margin expansion remains subject to loss experience, it added that improved earnings quality should help to support the sector until the cost of equity is covered.
Morgan Stanley believes that pricing trends will be sustained not only by recent loss trends, but also by the low interest rate environment, which will add further pressure on reinsurers’ investment returns.
COVID-19 is also regarded as a secondary driver as it adds to a number of uncertainties already looming on the sector.
“Whether the observed improvements will lead to margin expansion is subject to loss trends; however, a return to profitability will continue to be a key priority,” Morgan Stanley stated.
While pricing dynamics have become increasingly attractive, improvements in reinsurance have not yet matched those in primary and retrocession lines, although the gap has now reduced.
Morgan Stanley attributes this dynamic to more prolonged rate reductions in commercial lines, as well as the comparatively higher levels of capitalization amongst reinsurers, which has led to more modest and delayed improvements.
Analysts added that, within the retrocession market, rate momentum will continue to be supported by the problem of trapped collateral in the ILS space, combined with the difficulty of attracting new investors.