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Rate rises now largely factored into reinsurance shares, say analysts

18th June 2019 - Author: Luke Gallin

Analysts at Peel Hunt believe rate increases are already largely factored into reinsurance share prices, and suggest market participants trim their sector exposures in light of the U.S. hurricane season.

market growthIn 2019, a flattish January European renewals season was followed by modest price firming in April in Japan, on the back of consecutive heavy catastrophe years and a prolonged period of soft market dynamics.

In response, and most notably in loss-affected business, positive price movement continues in both specialty and reinsurance lines, but analysts warn that ahead of the U.S. hurricane season, this momentum is now largely factored into share prices.

Adding, that “after a good performance, with valuation multiples particularly elevated in the London market, we suggest trimming exposures.”

The global reinsurance sector is still managing loss creep from both 2017 and 2018 catastrophe events, which analysts feel makes it unlikely that anyone will meaningfully increase their exposure, even with the temptation of improved property catastrophe reinsurance pricing during the mid-year renewals, which focuses on the loss-impacted U.S. business.

Peel Hunt analysts highlight evidence that U.S. renewals have improved when compared with 2018, and say that the ongoing trend of sharp increases for loss-affected accounts and flat for non loss-affected, “should support underlying margin expansion across the insurers with a particular focus on reinsurance and specialty short tail lines.”

Year-to-date, analysts note that the industry’s performance has been strong in Bermuda, solid in the London marketplace and also positive in Europe.

In the coming weeks insurers and reinsurers will begin reporting their second-quarter and half-year 2019 results. Analysts are expecting a mix bag, as underlying earnings continue to come under pressure as reserve releases decline.

Throughout the soft market cycle, some increasingly utilised reserve releases to boost lower underwriting returns. With reserve releases declining it suggests companies have less of an ability to offset the challenging underwriting environment with reserve releases. However, market participants will be hopeful of achieving meaningful rate increases during the June and July 2019 renewals.

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