Investors should rein in any expectations of significant rate increases for US property cat treaties at the mid-year renewals despite last year’s $100bn+ of losses, warned JMP Securities analyst Matthew Carletti today (13 April).
“Upcoming June/July renewals are unlikely to have a materially different outcome than January 1 renewals, despite Florida being ground zero for Hurricane Irma”, explained Carletti.
He continued: “The rapid and sizable reload of insurance-linked securities (ILS) capital suppressed pricing improvement at January 1, in yet another show of the commoditisation of property catastrophe reinsurance”.
US property cat rates that renewed at 1 January only nudged up between 5-7 percent on average and Carletti disagrees with those who believe rates will rise further when the 1 June Florida-focussed treaties renew some nine months after Irma caused significant losses in the state (PCS loss estimate $17.2bn).
“The mid-year renewal is likely to look very similar to the January 1 result,” he predicts.
“The culprit appears to be ILS capital, particularly from newer vehicles, as those markets look to put freshly raised funds to work. Whatever questions the market had about the ability of ILS capacity to reload post-event seem to have been answered, as the ILS market was not only able to reload lost capital, but by our estimation came to the January 2018 renewal with more capital than it had a year prior”.
The ILS market has grown to a new record size of around $90bn after significant post-loss fundraisings by most ILS fund managers in 4Q 2017, including $2.5bn+ from Markel CATCo.
Carletti added that the industry’s first quarter earnings should be largely unaffected by cat losses after a modest quarter for cat events (California mudslides, winter weather in northeast US and the European winter storms). The gradual rise in interest rates may create a small headwind on (re)insurer’s book values, he added.
Finally, he added that new tax rates and new accounting treatment for unrealised gains on equities could add some volatility.
“While Q4 earnings calls nearly all featured some amount of discussion on where new post-reform tax rates would fall, Q1 results will give us the first firm evidence of the answer, which could result in some higher-than-normal EPS volatility vs. estimates,” Carletti predicted.