Analysts at RBC Capital Market have issued a report that forecasts “another year of favourable underwriting conditions” for the reinsurance sector, adding that natural catastrophe losses, inflationary pressures, poor underwriting performances and a supply-demand imbalance “collectively play into the reinsurers’ favour.”
Citing early commentary from the January 1 renewal period, RBC analysts observed tangible signs of the hard reinsurance market, particularly as property covers with high natural catastrophe exposures saw price increase of up to 100%. Similarly steep increases were seen for specialty covers due to the impact of the war. Even the “calmer” casualty contracts moved in favour of reinsurers.
Amid price increases, the report noted that the January renewals suggested a “step change,” with contract structures and terms also being revised “dramatically” in some cases.
With what seems to be a reset of underwriting terms considering a step-change in reinsurance prices in some pockets, as well as meaningfully revised contract structures, the RBC analysts said they feel “even more positive on the sector, particularly its relative attraction to other sectors at the current juncture.”
In the report, RBC analysts named SCOR and Conduit Re as their top picks for the sector, following a near-term preference for shares that screen as inexpensive.
The Specialty cohort also screens as better value relative to the reinsurers, the analysts added.
SCOR, they said, should see a “turnaround year” in 2023 due to the extensive remediation actions it has taken in the past year that should help close its valuation gap.
As for Conduit Re, having a harder insurance market than assumed in its initial plans should drive an accelerated build-out of the business in its third year of operations and deliver a mid-teens ROE without risk of dilution from legacy issues.
“Ultimately, we think the relative winners will be based on how the earnings outlook has improved relative to expectations as and when we get the respective company updates,” the analysts said.
