Reinsurance News

Specialty reinsurers’ combined ratios may be ‘too conservative’: RBC Capital Markets

18th April 2023 - Author: Akankshita Mukhopadhyay

RBC Capital Markets said specialty reinsurers’ combined ratios may be “too conservative” due to factors such as conservative reserving, rebuilding reserve buffers, and higher investment returns which could offset weaker underwriting returns.

Insurers are expected to report strong solvency positions and detail any relevant asset exposures, with a focus on the outlook for markdowns on private assets, RBC Capital Markets analysts said highlighting key points to focus in the first-quarter of 2023.

Large losses from events in Turkey/Syria and New Zealand may disproportionately impact European reinsurers, while early commentary suggests the April renewals have progressed as expected.

Inflation remains a concern for the insurance sector, with most downside risk coming from back books. Updates on prior-year development and 2022 reserve triangles are eagerly anticipated.

The upcoming implementation of IFRS17 reporting will impact analysis of earnings and valuations, and further understanding of its impact is desired, the analysts said.

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According to analysts, solvency positions within the insurance sector remain strong. Furthermore, the reversal of losses under IFRS17 is expected to bring these positions in line with regulatory requirements and shift the perception of risk.

The insurance sector saw a rally in shares after Hurricane Ian in 2022, outperforming indices by 10% on average. However, since then, performance has been mixed, with some previously outperforming companies such as Beazley (BEZ), Lancashire (LRE), and Hannover Re (HNR1) now lagging. There is potential for LRE and CRE to recover to pre-banking turmoil levels, the report noted.

Analysts suggest that the Specialty cohort of insurance companies offers similar defensive appeal to reinsurers during times of macroeconomic volatility. Additionally, current valuations on both absolute and relative bases are deemed more attractive.

“We think BEZ and LRE have been overly discounted and see scope for re-rating in the near term,” RBC Capital Markets noted.

Consensus estimates for earnings within the insurance sector have remained largely stable since the respective fiscal year updates. This suggests that changes in share prices have been primarily driven by de/re-rating.

According to analysts, current valuation levels for insurance companies are at historical lows, despite an average ROE of 20% and a defensive growth appeal in the face of economic uncertainty.

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