Re/insurance market analysts expect pricing in the reinsurance sector to improve to levels seen in 2015, resulting in higher 2018/2019 profit estimates and improved combined ratios for Europe’s big four, on the back of one of the costliest quarters on record for global natural catastrophe losses.
Citing recent comments from reinsurer Hannover Re that suggested prices could return to 2015 levels, analysts at both RBC Capital Markets and Deutsche Bank have said that this expectation is reasonable, which in turn would see combined ratios of European players improve also.
“Our key assumption is that price increases back to 2015 price levels,” said Deutsche Bank, in a recent European reinsurance market note, while RBC, in its European reinsurance industry commentary, said that a price movement back to 2015 levels was “reasonable,” given the scale of the losses from hurricanes Harvey, Irma and Maria, and the two Mexico earthquakes.
Analysts from both firms expect an improvement in pricing to 2015 levels, which suggests a c.15% increase in property catastrophe pricing, according to RBC, and and improvement in profits by c.6%, according to Deutsche Bank, resulting in improved combined ratios at the European players and, also improved profit estimates for 2018 and 2019.
Assuming a market loss of $95 billion from the catastrophe events experienced in the third-quarter, Deutsche Bank has become more optimistic on the pricing outlook, and improves its combined ratios for the four big European players, Munich Re, Swiss Re, Hannover Re and SCOR, by 1.5% over 2018/2019.
RBC suggests a similar impact to combined ratios, suggesting that a return to 2015 price levels would see European reinsurers’ combined ratios improve by low single digit levels, of between 1% to 2%.
Despite viewing a return to 2015 price levels as reasonable, RBC does warn that the impact of locked alternative reinsurance capital at the January renewals, which is unable to be redeployed, could provide an upside risk.
“We expect to see price increases improving as the year goes on, with loss affected business in the US renewing later on in 2018,” said RBC.
Adding; “If price increases materialise in 1H18, this better priced business will not fully benefit earnings until 2019 in our view. Looking back to 2011, it wasn’t until 2013 that the European reinsurers began to meaningfully improve their combined ratio guidance.”
Based on a return to 2015 price levels, analysts at Deutsche Bank expect pricing for the entire sector in 2018 to increase by 1.25%, and by another 0.25% in 2019, “mainly due to positive spill-over effects from April and July 2018 effects into 2019.”
“We believe that higher prices will lead to stronger volume growth than we originally expected. We therefore also adjust upward our volume assumptions for all players. While we uniformly raise our price assumptions within the sector, we slightly differentiate between the players in respect to volume growth,” said Deutsche Bank.
Insurers and reinsurers have now started to report third-quarter 2017 financial results, which is showing just how much of an impact the high level of catastrophe losses experienced in the quarter is having on the sector’s profitability, during an already testing time for the marketplace.
While rates are expected to increase at the upcoming January 1st, 2018 renewal season, it will be interesting to see by how much, and whether any uptick in pricing is sustainable in a very competitive industry.
