Reinsurance CEOs were bullish on the pricing environment during the recent Q3 earnings calls. In this update, Nick Martin analyses what is being said about the upcoming January renewal season.
Mr Martin manages over £1 billion of insurance equities in the Polar Capital Global Insurance Fund. Its largest holdings at the end of October were Marsh (7.04%), Chubb (6.91%) Arch (6.44%), Markel (4.82%) and Fairfax (4.52%).
In the third quarter we witnessed the devastation of Hurricanes Harvey, Irma and Maria as well as two earthquakes in Mexico. These awful events are a reminder of the pivotal role that the insurance industry plays in helping society recover and rebuild from catastrophic losses. The industry can, and will, play an even bigger role in future particularly as Hurricane Harvey has highlighted the significant extent of underinsurance of flood risk in Texas and other parts of the US.
Estimating the cost of damage and ultimately how much of this is insured is a long and highly complex exercise. Catastrophe modelling companies such as RMS and AIR publish loss estimates but these are often subject to revision and can themselves differ widely between companies. At the time of writing most commentators suggest that collectively Harvey, Irma and Maria will cost the insurance industry c.US$100bn. Significant uncertainty exists around the extent of business interruption losses with Puerto Rico (hit hard by Maria) expected to be without its normal power supply for many months. In addition, the cost of damages will be inflated by “demand surge” due to the limited availability of loss adjustors and delayed reconstruction. When you add this US$100bn to the below average US$20bn of losses from the first half of the year, and another $10bn+ from the Mexican earthquakes and California wildfires we are getting very close to the c.US$130bn of losses from the record catastrophe years of 2005 (hurricanes Katrina, Rita and Wilma) and 2011 (Japanese earthquake and tsunami, New Zealand earthquakes, Thailand floods).
We are already seeing pricing turn higher and momentum is building as we head towards the key 1 January reinsurance renewals. The following are a selection of recent management comments:
- “I believe we are at the beginning of a firming price environment, driven by years of soft pricing that has resulted in inadequate rates in many classes. The magnitude of this year’s cat losses, which on a worldwide aggregate basis was between a one-in-five and one-in-ten year industry event, simply adds to the pressure to return to pricing that produces an adequate risk-adjusted return. In that regard, we intend as usual to demonstrate leadership.” – Chubb
- “ROEs have been under pressure for many years now. Loss trends are on the up. Reserve releases are declining for the industry, and interest rates are stubbornly low. Rates have no way to go, but up in our opinion... While the returns for E&S [excess and surplus lines] property were also challenged in recent years and this quarter in particular, we expect it will be the strongest property market in the U.S. for the foreseeable future. We're already seeing renewals that are up 10%, 20% and more with tighter conditions.” - AXIS Capital
- “Looking forward, I am excited about the future. Our balance sheets, and those we manage, are fully capitalized and we are prepared for the opportunities we anticipate at the January 1 renewal.” – RenaissanceRe
- “The increase [£450m/39%] in capacity [for 2018 for Lloyd’s Syndicate 33] is driven by an anticipated improvement in market conditions and a desire to have sufficient capacity available to participate in a widespread market turn.” – Hiscox comment on their business forecast for their Lloyd’s of London business
Understandably most attention from industry analysts is currently on the property catastrophe reinsurance pricing impact. The spill over impact into other classes of businesses we believe is not being fully appreciated. This will likely change over time particularly as we head towards 1 January when approximately two thirds of global reinsurance business gets renewed. For the first time in five years analysts will be able to speak of rising catastrophe prices at this key renewal which we believe will boost sentiment to the sector. We have already seen a handful of analysts upgrading stocks. More will likely follow.
23 November 2017
Nick Martin is the Fund Manager of the Polar Capital Global Insurance Fund.
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Posted: Monday, November 27th, 2017