Analysts at BofA Securities predict that Europe’s four leading reinsurers are poised to reap the rewards of favourable market conditions in 2024, thanks to strong outcomes observed during mid-year renewals.
One key factor driving these conditions is the limited influx of new capital into the reinsurance sector during the current hard market cycle.
Unlike previous hard markets, the current cycle has witnessed a notable absence of new capital entering the reinsurance industry. Typically, as rates rise, new companies emerge, and existing reinsurers raise funds to capitalise on favorable pricing dynamics. While some capital has been raised by existing players in 2023, it pales in comparison to previous hard markets, and there has been a lack of new market entrants thus far.
This shortage of new capital has been surprising for large incumbents, according to BofA analysts, though they note that nobody is complaining about it.
Reinsurance rates have been on an upward trajectory since the January 1st, 2023 renewals, and terms and conditions have also tightened throughout the year. Reinsurers have maintained discipline in response to elevated losses from significant events, increasing secondary perils, and the impact of inflation on loss costs.
The relatively stable supply of reinsurance has resulted in a robust mid-year renewal season for reinsurers. While supply has generally been able to meet demand, it has been contingent on the right price and structure as sellers held firm.
Re/insurance brokers have described the mid-year renewals as orderly and disciplined, reflecting the reduced risk appetite of reinsurers and their efforts to raise attachment points. As a result, primary insurers are expected to shoulder a greater share of catastrophe losses in the second quarter, with wildfires and other secondary perils accounting for a significant portion of the losses.
The recent loss experience, particularly from less well-modeled secondary perils, may explain why new capital has not flowed into the reinsurance sector as it has in previous hard market cycles.
Overall, analysts maintain a positive outlook on the operational performance of European reinsurers and anticipate favorable market dynamics to persist into 2024.
“While we anticipate limited potential for further margin expansion in 2024 (absent significant losses), we anticipate upside in property and casualty reinsurance top-line growth forecasts due to attractive margins,” the analysts state.
It remains to be seen whether capital will enter the sector in a meaningful way and, if so, whether it will be sufficient to impact both pricing and discipline.
In the property segment specifically, reinsurers have faced profitability challenges in recent years. Consequently, many will hope that the current hard market continues into 2024 and beyond.
Additionally, the bulk of catastrophe losses typically occur in the second half of the year. While forecasts for Atlantic hurricane activity are mixed, the impact of a single storm making landfall in an unfavourable location, as witnessed with Hurricane Ian last year, can significantly elevate annual insured losses.
