Property cat pricing holds at renewals, discipline to extend into 2025: Jefferies

Analysts at investment bank Jefferies came back from a trip to Bermuda meeting with reinsurance and ILS market executives with the conclusion that property catastrophe pricing has held up well, perhaps better than anticipated, and that market discipline is expected to extend into 2025.

The analysts say they remain positive on the sector following their Bermuda trip, noting that, “Property-catastrophe pricing appears to have held up well, with the middle layers of programmes where our coverage universe competes remaining broadly stable.”

The overarching takeaway from meetings with reinsurance and insurance-linked securities (ILS) executives in Bermuda was that “market pricing remains at very attractive levels,” the Jefferies analyst team went on to explain.

Because of this, specialty underwriting firms are expected to continue benefiting from the hard market environment.

The analysts note that most are discussing single digit rate decreases for higher-layers of reinsurance towers at the June renewals, but that mid-layers seem to have held their price and been largely stable, which they see as “a positive surprise.”

The Jefferies team explained, “We understand that the pressure to pricing was contained in the higher, more remote layers (1-in-100 or higher), that are weighted to ILS.”

But they also said that while supply of reinsurance capital has increased, helped by record catastrophe bond issuance again so far this year, “demand has increased as well, with reinsurers believing that there remains pent-up demand.”

In property catastrophe reinsurance, the analysts say industry sentiment “remains positive” with expectations that firmness overall will persist.

The Jefferies team say that companies are, “expecting the market to remain disciplined at the 1/1/25 renewals, regardless of the outcome of the hurricane season.”

However, they also note that “a benign hurricane season would likely lead to some rate reductions.”

With a very active hurricane season being forecast, as we’ve documented, the Jefferies team has an intriguing view on how a damaging hurricane season would impact the market.

“An active storm season would likely moderate ILS capital inflows in 2025 as well, which would support the pricing backdrop even further,” the Jefferies analysts believe.

Of course, a dent to capital is to be expected in any major catastrophe event that is covered by the cat bond or insurance-linked securities (ILS) market, but that would also be anticipated for the traditional reinsurance market as well.

Hurricane Ian clearly showed how higher attachment points were starting to benefit the ILS market and reinsurers, with far less in realised losses for the catastrophe bond market than was originally anticipated after the hurricane struck.

It’s hard to predict where capital erosion would occur and to what degree after hurricanes now, given the higher attachment levels in ILS and cat bonds.

But, what is certain, is that traditional reinsurance capital occupies most of the lower-layers of the reinsurance towers, so the hit to that side of the market seems likely to prove the biggest, after any major storm landfall.

Then, it’s important to consider the ability to reload capital and how ILS markets may be able to achieve that faster than traditional reinsurers.

All of which means it is uncertain, in our view, just how much or how long of an impact a damaging hurricane season would have on the cat bond and ILS market today.

Some loss of capital and some slowing of flows is of course guaranteed, as investors and fund managers will wait out loss development for a time. But, if the season is impactful we expect cat bond and ILS fund managers will be able to take advantage of rate increases around the end of year renewals, just as readily as traditional reinsurance companies would be.

Naturally, any major hurricane losses will change the conversation with investors. But, with the response from catastrophe reinsurance rates likely to be an upwards one, it’s expected interest to deploy more capital will be significant for 2025 in that scenario.

Ultimately, for the ILS capital interest and flow to be severely disrupted for a prolonged period of time, it would require a really significant hurricane loss to occur, which would be disruptive to the traditional side of the market as well, Artemis believes.

Finally, Jefferies analysts said that reinsurers told them that elevated hurricane forecasts have “not influenced their underwriting approach in 2024.”

But, they did say that, “According to ILS managers it may have impacted catastrophe bond pricing.”

The analysts note that, “Whilst forecasts are elevated, the pricing backdrop and significant excess capital means that the (re)insurers in our coverage are well-placed for an above-average windstorm season, in our view.”

Given where catastrophe bonds attach in 2024, we’d suggest the cat bond market and much of ILS is also generally well-placed for hurricane season, with the spreads being earned able to cover relatively significant industry events now, before funds start to experience significant draw-downs.