Munich Re’s recently announced conservative and reduced profit guidance for 2017 suggests it’s time for reinsurance prices to cease falling and start increasing, a trend that could be supported by the slowed entry of alternative capital and more moderated reserve releases across the industry, says J.P. Morgan.
A recent note on reinsurance giant Munich Re from analysts at J.P. Morgan highlights the firm’s reduced profit guidance of €2 billion to €2.4 billion, when compared with a €2.6 billion full-year net profit in 2016.
The conservative reduction, says J.P. Morgan, “is we believe a clear signal by the group that it is now time for reinsurance prices to stop falling and start rising.”
Rates in the global reinsurance industry have been under significant pressure for some time now, declining renewal after renewal, albeit at a slower pace at the key January 1st 2017 renewal season, driven by intense competition and a supply/demand imbalance as a result of the persistent influx of alternative capital.
According to J.P. Morgan the pricing history at the annual January renewals is as follows: +0.5% 2013, -1.5% 2014, -1.3% 2015, -1% 2016, and -0.5% 2017. So while rates continue to be down in the space, there is a notable trend of rate declines decelerating from 2014 to the most recent January renewal.
It’s expected that rates in the reinsurance industry will remain negative, for the most part, at the upcoming April and June/July renewals, but market dynamics could suggest a 0% renewal at January 1st, 2018, says J.P. Morgan.
Despite a continuation of rate declines expected for the remainder of 2017, “the slowdown in capital allocation by alternative capital providers like pension and hedge funds means that the Jan 18 renewals are likely to be flat overall which means the cycle may be about to turn,” says J.P. Morgan.
J.P. Morgan explains that this view was also expressed by Munich Re during its recent investor day presentation, with the reinsurer stating that “due to moderating risk appetite from alternative capital providers including pension funds and hedge funds, the excess capital level in the sector may be stabilizing and this could lead to a 0% renewal at Jan 18, particularly as Munich said reserve releases are likely to moderate going forward as a source of profits for the sector as a whole.”
It remains to be seen if rates in the sector continue to decline through 2017 and into the January 2018 renewal season, but it will likely be promising to hear for market players that market dynamics could suggest that a turn in the market cycle is near. Reinsurers have started to pull-back from business where margins just aren’t sufficient and reserve releases have been seen to be less aggressive in recent times, as players focus on discipline and efficiency in order to navigate the testing market environment.
Of course, a substantial loss event that results in the removal of a truly significant volume of capacity, both traditional and alternative, could also start a turn in the market, although with an expected flood of third-party reinsurance capital waiting to enter after the next loss-event, it’s unclear just how large of an event is needed to push rate movements into positive territory.
J.P. Morgan explains that such large events are typically a catalyst for pricing recovery in the reinsurance industry, suggesting that although a conservative profit guidance from Munich Re, prudent reserving and reduced entry of alternative capital might lead to a 0% January 2018 renewal, only time will tell.
“The one caveat is that in our experience, an actual recovery of pricing to positive figures has historically been associated with a large loss event: these events which were associated with a rise in prices include Hurricane Andrew in 1992, 9/11 in 2011, Hurricane Katrina in 2005 and the Tokyo quake in 2011,” said J.P. Morgan.