Resilient carrier share prices in wake of Ian suggest further hardening to come

Analysts at investment bank Jefferies say the “benign” (re)insurer share price reaction to potential losses of about $65bn from hurricane Ian suggests the storm will prove to be an “earnings” rather than capital event in coming quarters for the industry, but will still add further momentum to market-hardening pricing at year-end.

Third-quarter claims will be heavy for reinsurers in particular and some may post losses for the full year because of the scale of the hurricane. A minority of carriers may also face credit ratings downgrades, said Jefferies.

At the end of September, for example, AM Best placed Scor’s rating on negative partly because of its relatively high catastrophe exposure.

But the fairly robust performance of reinsurance and insurance shares strongly suggests that investors are buying the talk at Monte Carlo that rates will harden further in coming renewals and deliver improved results for carriers next year.

“Although the industry is still counting the cost of hurricane Ian, estimates are surging, from an initial forecast of $20bn-$30bn, to $45bn-$65bn today. Nevertheless, we have been surprised by the relatively benign share price reaction, with investors evidently looking to the substantial renewal pricing upside rather than the quarterly earnings headwind,” said Jefferies.

The analyst points out that after a relatively benign start to the Atlantic windstorm season, hurricane Ian “decisively readdressed” the balance at the end of Q3.

“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. Nevertheless, we do consider this to be ‘an earnings rather than a capital event’ in aggregate, albeit some already stressed reinsurers (e.g. with high exposure to earlier catastrophes this year), may find themselves in a loss-making position this year. In a minority of cases, credit ratings may even be in question, making strong performance next year critical (in turn contributing to pricing upside),” said the analysts.

Jefferies noted that the (re)insurance industry was expecting rate increases at year-end even before Ian hit.

“Our read of the releases from Monte Carlo is one of clear bullishness from the industry, with strong demand expected amid constrained capital supply, leading to market dislocation and further pricing upside. Given that catastrophe reinsurance prices are already up +29% since 2016 (as per Hannover Re), further price rises are already coming on top of substantial underlying margin expansion,” stated the analysts.