Analysts at RBC Capital Markets believe reinsurance rates still have a favourable outlook after the mid-year renewals, despite being below peak levels seen last year.
The main message from broking groups following the mid-year reinsurance renewals was that it was a more stable environment than last year, as supply generally met increased demand, while reinsurers held the line on retentions and the tighter terms and conditions secured through 2023.
“Casualty lines aside, rate changes this year have been understandably more muted following the step-up in 2023. At a high-level, rates moderated from mid/high- single digits to flat/low-single digits,” RBC stated.
According to analysts, recent commentary has put the mid-year renewals as “mildly positive for US cat risks, where rates were said to be flat against the expectation of a modest decline.”
RBC believes this has been influenced by the active hurricane season forecasts. Separately, policy terms and structures stuck, although this was expected analysts noted.
Looking ahead, RBC expects underwriting conditions to remain highly conducive, even if rates start to moderate slightly (but remain at least in-line with loss trends).
At this stage, the outcome of hurricane season is a key driver of the renewals outlook. It appears that market discipline is being preserved, analysts have reassured, which should sustain a minimum level of rate adequacy regardless of the outcome.
RBC analysts have also reported that this hard cycle has seen soft returns. The pricing cycle started to harden in 2018, since then, the sector has only outperformed the Eurostoxx meaningfully twice, in 2018 and 2022.
2023 was also a decent year for reinsurers, as they saw a 7pt outperformance, according to the report.
“Over this period, we believe investor sentiment has shifted from one of jam-tomorrow (on impending rate hardening as observed in 2018), to a case of “show-me” owing to the succession of weak ROEs through 2022,” RBC said.
Concluding: “Understandably despite an average ROE of 20% in 2023 the shares have not responded stronger as the need to demonstrate a more sustainable trend of healthy ROEs prevails.
“The dual tailwinds of high investment yields and hard pricing should deliver good ROEs over the medium term in our view.”
