TV interview – KBW: Europe’s reinsurers doing well on rate but inflation threat will overshadow 2022
Europe’s reinsurers are having success in driving rate but the desire to build reserve buffers to protect against the threat of structural and social inflation will likely limit earnings expansion, according to Darius Satkauskas, vice president, equity research at Keefe, Bruyette & Woods (KBW).
Speaking on The Insurer TV’s Leading Voices ahead of the European 2021 full-year results season, Satkauskas said the continent’s (re)insurers are in a “somewhat difficult spot” given the number of competing pressures they have to juggle.
“On the one hand they know the hard market won’t last forever and they have to prepare for the future, but on the other hand, the headline rate increases are definitely nowhere near as good as what we saw in the hard markets in the early 2000s,” said Satkauskas.
He did acknowledge, however, that average rate increases at 1 January were higher than expectations – at least according to the flurry of broker renewal reports that emerged earlier this month.
The market will have even greater clarity next month when European reinsurers typically publish their own 1 January renewal experiences but the early consensus is that the big carriers held their nerve after the heavy cat losses last year.
Looking ahead, Satkauskas cautioned that senior P&C management teams are focused on the dual concerns of emerging inflation together with the impact of climate change on loss assumptions, alongside investor pressure for sustainable earnings growth.
“[They’re dealing with] loss expectations from rising inflationary pressures from both social inflation expectations and past experience, as well as structural inflation. And then at the same time, investors are eager to see how the market benefits in the P&L, so it remains to be seen how (re)insurers will balance these elements out.”
Satkauskas went on to say he believes the “desire to prepare for the future has to limit the earnings momentum”.
“I think that’s what consensus went forward and momentum has been muted,” he said.
KBW has previously highlighted its concerns around inflation and tail risks and the potential volatility these bring for European (re)insurers, but Satkauskas said he is cautiously optimistic that the recent rate increases will at least offset the negative trends.
“Even if social and structural [inflation] trends are negative, one could argue that price increases more than offset that and we’re not arguing with that,” he said.
“New business pricing in some of the US casualty lines may well be exceeding those loss cost trends, but we’re cautious about this.
“If there is a company that has been writing this business for over a decade, had underwriting missteps in the past and weak reserve buffers, I think we are right to be cautious until we see the trends improving and signs that reserving and underwriting functions aren’t under pressure,” he added.
During the 15-minute interview – conducted alongside his US-focused colleague Meyer Shields – Satkauskas highlighted three key themes that would emerge during the Q4 earnings season: the impact of rate, the impact of 2021 losses and Covid-19 mortality experience on life reinsurance books.
The 1 January renewals are significant for Europe’s heavyweight reinsurers as over 50 percent of global treaty P&C business renews at this time including most European business.
“Investors will be looking at what premium rate increases companies are reporting and then differences among companies,” said Satkauskas.
After a bruising nine months, Satkauskas said the fourth quarter brought some welcome stability with a small number of attritional loss events totalling around $5bn, according to KBW estimates.
“However, we think it’s important to note that due to the loss experience in the first nine months, reinsurance participation might be high in the fourth quarter and we think it’s not impossible that we might see some negative development from prior quarters’ large losses in the fourth quarter,” he added.
Finally on Covid, the mortality figures and a delay in the reporting of these numbers could lead to more unanticipated losses in the final quarter, warned the analyst.
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…