Despite some near-term uncertainties surrounding tax regulations, Keefe, Bruyette & Woods analysts remain optimistic about the Bermuda reinsurance market and maintain their outperform ratings on several leading reinsurers.
This conclusion was achieved following the semi-annual Bermuda Tour, where KBW analysts met with reinsurance executives to discuss market conditions and outlook.
From their key takeaways, KBW stated in its report that rate decreases are expected in property catastrophe reinsurance, ranging from 5-15% during the January 1, 2025 renewals.
Pricing should rise for loss-impacted cedents and be close to flat for lower coverage layers. Retrocessional reinsurance rate decreases should approach (and occasionally exceed) 20%.
European catastrophe reinsurance rates will probably drop by up to 10%, despite recent losses. Additionally, in light of the significant number of large losses in 2024, cat reinsurance rates will be likely to rise for the admitted small Canadian market, according to the report.
Regarding terms and conditions, reinsures are maintaining the material per-occurrence attachment point increases implemented in January 2023. According to analysts, reinsurers are not willing to change these as they have significantly insulated them from recent, persistently elevated weather-related loss frequency.
Higher attachment points are viewed as more valuable than a few rate points, and very few cedents are even pressing for lower nominal attachment points.
Analysts also noted that reinsurers are slightly more willing to cover all perils (not just named) and riot/terrorism, including aggregate covers, which exposes them to more frequent secondary peril losses (like severe convective storms).
According to the report, reinsurers and brokers are attributing rate decreases to supply or capacity growth, which were the result of almost two years of very strong retained reinsurance earnings. They also view existing players’ capital raises and the number of new companies being started is very small.
Strong property reinsurance returns are also driving reinsurers to pursue growth in that area, over primary casualty lines’ rate adequacy amidst high social inflation. This, coupled with strong balance sheets, has reduced the need for both retrocessional cover and some insureds’ need for reinsurance.
Additionally, analysts noted that broker movement in recent years (likely due to market concentration concerns) and high compensation packages, reflect hiring firms’ expectations of revenue growth driven by cheaper reinsurance.
KBW’s report also highlighted a slightly late renewal season, as analysts have observed a slight delay in contract signings this December compared to previous years.
This delay is mainly attributed to widespread doubts about the accuracy of Hurricane Milton’s insured loss estimates from Verisk’s Property Claims Services (PCS).
While opinions differ on whether brokers are advising clients to hold off on firm orders to potentially secure greater rate reductions closer to January 1, most executives believe this tactic will not significantly impact market pricing.
Regarding 2025 property catastrophe reinsurance returns, KBW stated these are expected to remain very strong. One executive, analysts noted, quoted a reinsurance broker study estimating the industry’s expected loss ratio to be in the low 40s, compared to the actual low-60s long-term average.
It is generally still expected that events under $40-50 billion will largely impact primary insurers.
Reinsurance brokers face fading organic growth from rate hikes and inflation, and rising competition. However, increasing exposure units and demand for catastrophe coverage, driven by strong primary property pricing and updated catastrophe models, should still fuel premium and revenue growth in 2025.
Regarding Florida’s mid-year reinsurance renewals, executive expectations are mixed, according to KBW’s report. Some are optimistic due to anticipated retained reinsurance earnings and increased confidence in legislative reforms.
One executive reported legal representation on less than 10% of Hurricane Milton claims received to date, versus roughly 30% on similarly aged prior storms.
Others are cautious due to the high number of loss-impacted clients who are heavily reliant on reinsurance, and lingering concerns about Florida’s legal environment.
“We’re a little less optimistic about Florida pricing than before our visit, mostly because the momentum embedded in industry cyclicality will probably push some reinsurers to write business in 2025 because 2026 will probably be cheaper still,” analysts stated.
There is also disagreement on whether catastrophe reinsurance pricing will deteriorate to the lows of 2016/2017. Optimists cite improved data analytics, more sophisticated capacity providers, and higher interest rates, while pessimists point to the unchanging nature of human behaviour.
KBW stated: “We’re somewhat in between; we don’t think we’ll fully repeat the last soft cycle’s worst mistakes (more recent primary insurance cycles have been more moderate than older cycles), but see no reason not to expect compounding decreases over the next several years, absent individual very large (and hence reinsurance-impacting) losses.”
The specialty lines and most casualty lines rates rise was also among KBW’s key findings. It seems that reinsurers feel more comfortable with specialty lines than with US casualty lines because of the latter lines’ longer tail and still-elevated social inflation.
Reinsurers writing casualty emphasised sustained caution and conservatism, prioritising risk selection, rate increases, and to a lesser extent declining ceding commissions as components of solid expected returns, the report added.
Moving on to taxes, the report highlighted that there are significant near-term uncertainties. These involve the Bermudians’ ability to use or retain all or part of the deferred tax assets (DTA) established of Bermuda’s 15% corporate income tax rate that will take effect on January 1, 2025.
There is also uncertainty about whether other Bermudian taxes, like payroll and property taxes, will decline to offset the corporate income tax.
“We cannot predict how these decisions will play out; one prominent reinsurer CFO thought a full DTA unwind was unlikely, and – in part reflecting the lower premium growth prospects embedded in current pricing trends – we don’t think any of the companies we cover will be remotely capital-constrained,” said KBW.
Adding: “We believe that Bermuda’s government is very interested in preserving its status as a preferred domicile and will do as much as it can to keep (re)insurers on the island, which, regardless of the DTA question, should translate into lower payroll and/or property taxes, which are currently included within the companies’ operating expenses. In the near term, though, (re)insurers’ 2025E earnings will probably include both higher income taxes and higher tax-driven operating expenses.”
Finally, regarding investment, analysts concluded that Bermudian have weakened recently, likely due to larger-than-expected catastrophe rate decreases and tax-related uncertainty.
While the tax issue may persist – which could limit the shares’ near-term upside – current valuations underestimate the reinsurers’ medium-term earnings potential in a favourable operating environment.
KBW expects improving market conditions to drive stock prices up over the next 12 months and maintain Outperform ratings on Arch Capital Group, Axis Capital Holdings, Everest Group, Hamilton Insurance Group, and RenaissanceRe Holdings.
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