With hurricane season now underway, the specialty re/insurance sector will see if an improved underlying (attritional) underwriting margin, together with higher investment returns, will be able to absorb the volatility of natural catastrophe exposures, Peel Hunt has stated.
Noting that if returns are above the cost of capital by the end of the hurricane season, a further re-rating of the sector would probably follow.
Despite a small wobble at the end of 2022’s first quarter, the sector has held on to the performance gains achieved since the fourth quarter of 2022.
Analysts highlighted that the sector continues to benefit from a dual tailwind of: 1) cumulative rate increases since 2017 starting to earn through – which have helped to improve underlying underwriting margin; and 2) investment yields improving as the short duration bond portfolio matures and is reinvested at higher interest rates.
“The key catalyst for the sector is to demonstrate that an improved underlying (attritional) underwriting margin (thanks to the cumulative rate rises achieved so far), together with higher investment returns, are able to absorb the volatility of natural catastrophe exposures,” said Peel Hunt.
Adding: “With the hurricane season kicking off this month, the evidence will be presented at the end of the season in October. Should it deliver returns above the cost of capital despite an average hurricane season, we believe this will lead to a further re-rating of the sector.
“We remain positive on the London-listed specialty re/insurance subsector, based on the attractive diversification provided from underwriting within the Lloyd’s market.”
