MC talks peg cat XoL down ~5% at 1.1 with reinsurers broadly firm on structures: Citi and KBW

Property cat rates will typically be off by single digits in 2025 but reinsurers remain reluctant to provide low-level earnings protection, according to bank analysts who attended the Monte Carlo Rendez-Vous this week.

Characterising the mood music as broadly good news for investors in reinsurance-focused stocks, analysts were largely positive on the sector’s earnings prospects following the annual Rendez-Vous, the largest event in the global reinsurance calendar.

“Many of our discussions revealed relatively limited rate reduction expectations at 1.1 (-5 percent to -10 percent in nat cat and flat to small down, risk-adjusted, for globally diverse reinsurers),” explained Citi senior P&C analyst James Shuck.

“In our view this would be a victory versus what investors are fearing, especially in the context of a likely benign hurricane season.”

KBW analyst Meyer Shields took a similar view.

“ Beyond the (perfunctory-sounding, to our ear) acknowledgement that there’s still a lot of time left in hurricane season 2024, the Rendez-Vous consensus was that property catastrophe excess-of-loss reinsurance rates will decline modestly during the January 1, 2025 reinsurance renewals,” he explained.

Shields continued: “Reinsurers anticipated flat to mid-single-digit risk-adjusted decreases and brokers foresaw 5-10 percent risk-adjusted rate decreases; we split the difference to adjust for the parties’ understandable biases and project risk-adjusted decreases within a couple of points around a 5 percent risk-adjusted decrease.

“Even with these expected modest [year-on-year] risk-adjusted decreases, reinsurers view US property catastrophe reinsurance as well-priced, including much-improved insurance-to-value ratios.”

Shields did note, however, that the picture is likely to be complicated in other geographies, not least Europe, which has experienced notable flooding and hail events in recent years. Some European countries, he suggested, will “probably rise somewhat in January, tempered by the view of Europe as a diversifier from the Southeastern US, which is still the industry’s peak catastrophe zone”.

Reinsurers also reiterated their reluctance to lower retentions or to provide frequency covers, a key structural change that has shielded reinsurers from the 2023-2024 H1 secondary cat loss events.

“Reinsurers are holding the line in terms and conditions, including attachment points, and [are] only prepared to concede a little on rate given strong levels of profitability,” explained Shuck.

Shields took confidence from reinsurers’ determination in this regard.

“Despite some anger over insurers’ and reinsurers’ diverging underwriting results stemming from the combination of materially increased per-occurrence attachment points at 1.1.23, which increased cedants’ retention of persistently elevated ‘secondary peril’ (hailstorms, windstorms, tornadoes, floods, etc.) losses, we saw no signs of reinsurer willingness to materially lower attachment points or otherwise loosen policy terms and conditions tightened at 1.1, other than for individual situations,” he explained.

This is despite growing warnings from brokers ahead of Monte Carlo – see The Insurer’s coverage of David Howden’s keynote speech at our London event last week and our video interview with Aon’s Risk Capital CEO Andy Marcell– that reinsurers were in danger of becoming less relevant.

Shields said he found this argument “pretty unpersuasive”.

He continued: “Cedants’ understandable desire for now-scarce earnings volatility protection doesn’t diminish the need for, or value of, still-available balance sheet protection. Similarly, there’s far less reinsurer willingness to lower rates for lower tower layers than on higher layers that have mostly been loss-free.”

Shuck did add, however, that he expects smaller, tier two reinsurers may be more vulnerable to broker persuasion than the larger global markets.

“We think that middle- and lower-tier reinsurers may be dragged somewhat lower down the layers if they are to retain the better-priced more remote risk business, but the larger players are less likely.”

He also noted that attachment points are currently around the “1-in-9-year return period having raced up from 1-in-3 a few years ago”, pointing out that rate on line on the latter is in effect a straight money swap (i.e. a 1-in-3-year retention would cost ~33 percent per annum.)

In contrast to the expected modest pressures on proerty cat, both analysts agreed it was a different picture with some casualty classes.

“US liability premium rate increases could continue, so we could expect mid-to-high teens rate increases and some improvement on the ceding commissions,” KBW said.

However, they recognised that it’s a nuanced picture with European reinsurers appearing the most cautious.

“Although European reinsurers remain sceptical about growing exposures, other reinsurers are starting to take a closer look even if everyone agrees that the social inflation trends should continue unless there is a tort reform.”

Shields added that reinsurers are taking a differentiated approach to casualty – some are looking to find good risks based on individual cedants’ data, underwriting capabilities, and risk selection, whilst benefiting from the recent rate increases.

Both analysts noted that capital was plentiful despite the discipline – with Shuck pointing to recent AM Best analysis suggesting there could be up to $100bn of industry excess capital.

“Reinsurers are making ~20 percent ROEs on a $600bn capital base in the context of perhaps only $20bn-$30bn of new limit demand.

“Many carriers will have some tough decisions to make on how to deploy this since growth strain is likely to be relatively limited and an uncertain geopolitical backdrop is a deterrent to resetting-type levels of buybacks,” he added. KBW also noted that corporate activity/interest was up and this may be a driver of more M&A.

But overall both analysts agreed the picture was one of relative stability and discipline.

“ The industry is exhibiting a unique level of discipline for now, with payback from previous loss years still top of mind,” concluded Shuck.

Graphics:

Guy Carpenter property cat RoL index

“CIAB: GL and umbrella rates start to pick up again”

“Global reinsurance – estimated dedicated reinsurance capital” (AM Best)