Reinsurers look to hold the cat line to consolidate ’23 gains

As early renewal positioning begins in Monte Carlo today, reinsurers are looking to consolidate the significant gains made this year in property cat pricing, T&Cs and structure, with rates adjusted for risk and inflation expected to be relatively stable in the absence of major industry losses in the coming months.

The signs are that demand for additional limit will be met with sufficient capacity – largely without price concessions – as a significant number of reinsurers lean into an environment where margins are visibly improving because of higher rates and attachment points that have moved them away from attritional losses.

That points to average rate increases that are largely expected to be in line with the view of inflation in the property cat market.

As is inevitable for the early shots that are usually fired at Monte Carlo, some reinsurers will likely communicate that there is need for further rate and brokers will suggest that some moderation is in order after the dramatic shift seen this year, with increased competition potentially putting downward pressure on pricing.

Indeed, Aspen CEO Mark Cloutier is one of those on the reinsurer side that has already come out and said his company is committed to “pushing” for further rate, as we report in our second lead article.

Others on both sides have privately told this publication they would be happy holding the line on rate, terms and attachment points.

Either way, the consensus from multiple conversations with senior reinsurer and broker executives in the last couple of weeks suggests that the challenging and chaotic lead-up to the 1 January 2023 renewal will not be repeated this year.

The turbulence late last year that strained some relationships between sellers and buyers gave way to calmer negotiations at the other major property treaty renewals of 1 April, 1 June and 1 July.

Of course, rate increases have been significant across 2023 cat renewals, as 1 January set the tone with hikes of as much as 60 percent in Europe, and up to 50 percent for loss-free accounts or as much as 100 percent for loss-hit accounts in the US, according to Gallagher Re’s renewal report.

But sources on both sides of the table have said that the key to the step change that occurred at 1 January was not so much headline rate increases as the structural shift in cat programs that imposed significantly higher retentions on insurance companies in Europe, the US and other regions.

Those retentions had remained largely unchanged for a number of years, but the more recent surge in inflation meant that the effective attachment points for reinsurers had been dropping meaningfully lower.

That in turn left them more exposed to the greater frequency of severity around secondary perils such as wildfire and severe convective storm (SCS), in addition to more major loss events in the US and internationally.

By right-sizing retentions, reinsurers have managed within one renewal cycle to effectively reposition themselves from providers of earnings protection to what many believe should be their true role by acting as an alternative form of capital to give balance sheet protection to cedants.

For buyers, the shift has been painful. Effectively it has resulted in insurers ceding more premium for less reinsurance coverage.

Combined with very limited availability of aggregate cover – at least at an economically viable price – the higher retentions have left them carrying the weight of H1 2023 attritional cat losses that have run to around $50bn, driven by a heavy burden from SCS events in the US.

That has been reflected in earnings so far this year, with carriers that have a heavy reinsurance leaning – including the big four Europeans – reporting sub-90 percent combined ratios across their P&C operations, and in some cases significantly lower than that for their property cat reinsurance business.

In contrast, insurers have seen elevated combined ratios for their property portfolios, especially in personal lines.

The pattern of retained losses has continued into H2, with secondary peril events such as the tragic Maui wildfire and the leftfield Californian Tropical Storm Hilary, along with another Tampa near miss with Hurricane Idalia which is also unlikely to trouble reinsurers.

As Jefferies analyst Philip Kett noted last month: “Lifting the attachment point means that a smaller volume of catastrophe claims are covered by reinsurance programs and those that do are materially less costly.”

Arguably the biggest theme of the year to date has been the flight by some major US insurers from writing admitted personal lines in certain cat-exposed states – most notably California.

Among the reasons cited are climate concerns and elevated reinsurance costs. But the crux of the issue is their inability to fully adjust underlying pricing to reflect those factors because of the restrictions around rate and form in operating as an admitted insurer.

Any hope of near-term relief from reinsurers is likely to be forlorn, however.

Stable adjusted rates?

Speaking to this publication in the lead-up to Monte Carlo, Aon’s CEO of Risk Capital Andy Marcell said that following a period of market challenges he doesn’t see anything at this time placing significant upwards pressure on reinsurance rates.

Indeed, he suggested there could be some downward pressure on pricing where reinsurers are competing for what they see as preferred partners (look out for the full interview in tomorrow’s issue).

“But at the same time, capital is not entering in large volumes and greater limits will be sought by insurers, so there won’t be a huge softening,” the executive predicted.

He did suggest that additional demand will likely equate to limit increases somewhere between 5 percent and 10 percent on average for the US and Europe.

Reinsurer sources have also talked about a stabilisation of the market in 2023 following the dislocation in the lead-up to 1 January.

Sompo International’s global reinsurance CEO Chris Donelan said some form of market equilibrium has been reached but warned that any attempt to push pricing down would likely be given short shrift by reinsurers.

“I believe we mostly cleared the price for participation [at 2023 renewals], but I think if people test the clearance price, they’ll find capacity to be not increasing in fact it could decrease,” he said.

Meanwhile, TransRe CEO Ken Brandt said he expects demand for additional limit to materialise in response to inflation that for the industry post event is likely to be higher than the consumer price index.

“I think the supply is there, on the reinsurance side, to meet that demand – it’s just going to get down to the economics [of] whether the ceding companies can afford it,” the executive suggested.

And there is optimism among the European reinsurance giants that momentum will continue in the sector.

Munich Re CEO Joachim Wenning said on the reinsurer’s recent Q2 earnings call that he expects hard market conditions to extend through 2024 and even into 2025 based on high levels of uncertainty in the market, with much “catching up” to be done and particular concern over the general decline in margins.

There is also confidence that there will be no meaningful divergence between the overall direction of travel in Europe and the US.

The 1 January 2023 renewal was notable in that it saw markets on both sides of the Atlantic moving in lockstep, as European cedants – especially those in loss-affected areas such as France and Germany – paid significant increases in addition to retentions going up.

This year those countries have not seen the same level of activity – although others such as Turkey and Nordic countries have seen loss events – but there is no expectation that the balance will shift back towards buyers any time soon.

In the US, another area of discussion will be potential additional limit being sought as insurers implement the new RMS Version 23 Atlantic hurricane model, which increases expected losses for Florida as well as Gulf of Mexico and other Southeast states.

Leaning into cat

What some have termed generational hard market conditions in property cat treaty business have seen a shift in appetite from a significant number of reinsurers as pricing and higher attachments points have increased confidence in being able to write profitable business.

If the question last year was as much about who was out of cat as who was in, this year the focus has been more on the growing number of markets looking to lean into the business.

Arguably the biggest headline grabber has been Berkshire Hathaway, which was not significantly active at 1 January but has since been a major provider of capacity, including high-profile plays such as taking a $1bn line on Florida’s Citizens.

Others known to have been more significant players at the 1 June Florida renewal include Arch, Ariel Re and DE Shaw.

Away from Florida, RenaissanceRe CEO Kevin O’Donnell said the reinsurer “leaned heavily” into the property cat reinsurance market at mid-year, taking advantage of rates for US business that went up by 30-50 percent on average, with the company confident the higher pricing “will persist”.

The Bermudian was among those that offered private deals on non-concurrent terms with core customers early in the renewal process. O’Donnell said that RenRe now believes the property cat business is “broadly rate-adequate”.

Another major mover this year in cat was Everest, which raised $1.5bn in the second quarter to support its growth ambitions and said it had begun deploying some of the funds raised on private placements, describing current property cat pricing as having surpassed that seen in the wake of Hurricane Andrew.

Others have leaned into cat not by raising money on their balance sheets, but through third-party capital vehicles.

They include Ark with its Outrigger Re sidecar, Vantage with its $1bn raise from third-party investors for its Chris McKeown-led AdVantage platform, and PartnerRe raising funds in its managed vehicles.

Cat bonds meeting some additional limit demand

After the talk at Monte Carlo last year centred around $20bn+ of additional limit demand from US insurers to cover the impact of inflation and rising exposure bases, much of that did not materialise at 1 January, amid stretched budgets and surging rates.

There have been attempts – some successful – to buy meaningful amounts of new cover through the year, however.

Those that have been made public include Travelers, which added a new personal insurance hurricane catastrophe excess-of-loss treaty at 1 July covering coastal states outside Florida.

The US giant also increased coverage under its existing Northeast cat treaty, which places at 1 July, after its 1 January corporate cat XoL.

Chubb is understood to be currently out in the market looking to secure an additional $500mn layer at the top of its cat program for Northeast exposures. Sources said the carrier has tested the water at a 5 percent rate on line in the traditional reinsurance market.

Others have instead turned to the ILS market to find additional limit out on the tail of their cat programs.

Travelers has been a consistent user of cat bond capacity and issued Long Point Re IV in May with $575mn aggregate principal to cover storms and quakes from Virginia to Maine.

The transaction contributed to a first-half issuance across the sector for property cat bonds of $9.7bn, on course for a record full-year total, according to Aon data.

“This year we’ve seen that completely turn around and pricing move down to even pre-Ian levels. That’s not about naïve capital, but simply that the cat bonds themselves as a structure have dealt with tail risk and the product has performed in line with expectations,” Aon’s Marcell told this publication.

“We have helped many clients find efficiency in buying major limit by taking the top end and converting that into a cat bond to reduce the stress on the cat program and find a much more efficient way to transfer risk at stabilising prices, and I think that will continue,” said the executive.