Shields, who was speaking during this week’s episode of Leading Voices at the start of the 2021 full-year earnings season, said there is a received wisdom among some investors that plentiful capital combined with the recent above-average cat years means earning targets cannot be achieved. 

But Shields said he is more optimistic, especially when reflecting on the positive trends at the recent 1 January renewals.

“One of the themes that we took away from the 1 January renewals was that there was enormous discrimination by cedant,” he said.

“Whether it was by expected losses or actual losses, we were seeing very differentiated pricing, and to the extent you have more agile, more insightful reinsurers, then those are the ones that will capitalise on either the best expected returns and/or those accounts with the biggest rate increases,” Shields added.

Meyer Shields, Managing director, Keefe, Bruyette & Woods

“As that gets demonstrated, and we will need mother nature to not come up with new ways of tripping us up over the course of 2022 … I think we’re going to see better-than-expected returns that should reinvigorate the confidence in at least some of the catastrophe reinsurers that are out there,” he predicted.

According to Shields, during Q4 and full-year 2021 results calls investors will be most interested in hearing whether rate increases are still outpacing loss costs given the various inflationary pressures at play.

Reinsurance January renewal rate changes

While the KBW analyst – who covers the listed US P&C sector – suggested underwriting profitability and aggregate expected returns should be of greater interest to investors because they “actually matter much more”, Shields also predicted the magnitude of rate increases in the US will remain above loss trends.

Social inflation continues to impact the liability side of the market, while property is also being hit with inflationary pressures, the analyst highlighted.

Meyer Shields, Managing director, Keefe, Bruyette & Woods 2

As Shields noted, there is also what he said is “an awful lot of concern” about the frequency of major storms hitting the US, as well as the number of unusual events.

“Anything unexpected in the insurance industry I think is a good catalyst for continued rate increases,” said Shields.

And Shields said that reinsurance rate increases at the 1 January renewals will be another catalyst for additional rate rises that will keep pricing ahead of loss costs.

Click below to see this week’s edition of Leading Voices, which asks KBW analysts Meyer Shields and Darius Satkauskas about their expectations for both the FY results season and the year ahead. Five questions, five revealing answers and a mere 15 minutes long. Worth bookmarking to watch…