Bank of America (BofA) expects European reinsurers to announce good 1/1 renewal pricing updates, with rises supportive of its 1.5% (net of claims inflation) rate increase assumption for 2022.
The bank also predicts European reinsurers to show signs of portfolio pruning in part of the property cat books in order to address the impacts of elevated natural catastrophe losses.
BofA says that if carriers are addressing these issues and over time can show lower catastrophe event market shares, this is likely to be an important catalyst for shares.
“Aſter the recent catch-up trade, the European reinsurers are now trading in line with the wider sector on a P/E basis. However we see further room for re- rating, given the attractive earnings outlook,” says the bank.
In fact, BofA estimates that the European reinsurers and London Market names are on track to deliver the best return-on-equities (ROEs) in more than 10 years, reflecting rate increases and assuming normalisation of large losses.
Looking ahead, and the bank expects 2022 to be another supportive year in terms of P&C reinsurance rate increases, with an estimate net rate increase of 1.5%, compared to the 1.5-2.5% achieved in 2021.
At a headline nominal basis this implies rate increases of around 5.5-6.5%, explains BofA.
“The continued attractive pricing environment is a reflection of continued poor large loss experience and a disciplined focus on profitability by at least the larger market participants,” says the bank.
“All in all, the 1/1 renewals seems to be supportive of our full year 1.5% net rate increase assumption, which should lead to continued margin expansion, with potential for some modest upside to our estimates,” it adds.
Overall, it expects that both reinsurance and commercial line pricing will remain robust in 2022, albeit slowing somewhat for commercial lines. But despite this deceleration, BofA does expect rate increases to remain above claims inflation for both sectors.
“The slowdown in commercial lines is a reflection of materially improved profitability aſter several years of meaningful rate increases. Some more difficult areas, such as cyber, continue to see very significant rate increases though,” says the bank.
