Strong performance in 2023 critical after Ian losses, warns Jefferies

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Analysts at Jefferies have warned that it is “critical” that insurers and reinsurers exhibit a strong performance in 2023, following the huge impact of Hurricane Ian on the market.

Jefferies notes that the investor reaction to Ian has been relatively benign, even as the re/insured loss forecasts have surged from an initial range of $20-30 billion to the current range of $45-65 billion from most modelers.

The firm conjectures that this is because investors and re/insurers alike are anticipating very favourable pricing conditions at next years’ renewals to offset catastrophe losses, as well as the negative influence of macroeconomic factors.

“Given the magnitude of this catastrophe and the continued spiralling of industry-wide claims estimates, it would be reasonable to attach a question mark to P&C reinsurance and group level financial targets in the industry,” Jefferies stated.

Analysts still consider Ian to be an earnings rather than a capital event for most re/insurers, but they did warn that companies with high exposure to earlier catastrophes this year could find themselves in a loss-making position this year.

In a minority of cases, credit ratings may even be in question, it said, making strong performance next year critical.

Fortunately for re/insurers, expectations were already that pricing would accelerate its upward momentum next year, even before Hurricane Ian had developed.

And, given that catastrophe reinsurance prices are already up +29% since 2016, Jefferies notes that these further price rises are already coming on top of substantial underlying margin expansion.

“In previous years, we’ve been of the view that the net present value of future price rises is worth more than the cost of claims today,” Jefferies concluded.

“However, having reiterated this argument for more than five consecutive years, we were concerned that the market’s patience would be wearing thin waiting for this thesis to pay off. As such, the resilience of share prices is both surprising and highly reassuring, as it suggests that the market is still prepared to take a longer term view.”

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