Rising specialty insurance rates and higher investment income due to an increase in U.S interest rates are expected to provide a welcome tailwind to the re/insurance industry in 2019, according to analysts at Peel Hunt.
The firm also anticipates a stable reinsurance market ahead of the Japan and U.S renewals in April and June/July, with signs that alternative capital is taking a more disciplined pricing approach.
Peel Hunt expects return on equity to improve in 2019 on a risk adjusted basis to 11%, up from 6% in 2018 and 2% in 2017.
Looking at the past three months, analysts found that the European reinsurers have shown the best performance (+6.9%) in part driven by delivering better returns in 2018 (7.6%) than their Bermudian (4.5%) and Lloyd’s peers (4.6%).
The Lloyd’s insurers are however catching up (+2.3% 3M; 7.2% 1M) as specialty insurance rates in the London market are likely to continue to improve in 2019.
Peel Hunt also reported that the re/insurers it considers to be high risk performed well with catastrophe losses in 2018, which made up around 8-9% of net asset value.
In contrast, re/insured that were deemed as low risk had a much higher exposure to aggregate catastrophe losses in 2018 than expected given that 2018 was generally characterised by medium sized events.
On average, 2018 returns on equity across the reinsurance sector were 6%, according to Peel Hunt, which was below the cost of equity (9-10%) for a second consecutive year (2017 2%).
Analysts said the only two reinsurers that were able to deliver returns above the cost of equity in 2018 were Hannover Re and Arch Capital.