Given the quantity of capital in the worldwide reinsurance system, analysts at Morgan Stanley are asking how much lower pricing could decline within the property catastrophe line of business?

The equity analyst team that focuses on insurance and reinsurance on the multinational investment bank and financial services company say that after the recent earnings season investors are seeming more cautious on the direction of pricing for reinsurers.

Sentiment on pricing for property catastrophe reinsurance renewals has fluctuated in recent months.

Back firstly of the reinsurance conference season, the broad expectation appeared to be that while attachments, terms and conditions might hold, there was likely some room for pricing to melt on the January 2025 renewals.

Then, along got here hurricanes Helene and Milton, which drove an initial change within the sentiment, because the industry began to plant the seed that pricing may now prove more stable in light of the expected industry losses from those catastrophe events.

But, with Helene and Milton each again showing that the first insurers were more likely to absorb the biggest share of those loss events, particularly with hurricane Milton that saw loss expectations for that storm decline from the initial estimates, the sentiment itself softened somewhat.

But, Morgan Stanley’s analyst team also point to capital returns announced by major reinsurers across the recent earnings season, which while relatively sizeable in some cases are said “not enough to siphon excess capital from the reinsurance system.”

Reinsurer results “demonstrated resilience from catastrophes” the analysts explained, with some reporting lower than expected catastrophe loss figures.

Nevertheless, the analysts state that on P&C reinsurance, “With commentary around terms & conditions more likely to proceed holding strong, we proceed to be bullish on the sector.”

But they query, “Given the quantity of capital within the system, how much lower will pricing decline for property-catastrophe? From our perspective, we consider pricing will likely decline by low to mid single digits, which is mostly manageable.”

Pricing is more likely to trend down, the Morgan Stanley team consider, saying, “Given the relatively manageable hurricane season risks to this point, and more muted pricing in 2024, pricing power could face some pressure in 2025.”

Adding that, “Strong underwriting led to reinsurers generally beating expectations on combined ratios. The recent capital return announcements from Arch Capital and RenRe could indicate a softer market environment going forward, because the return was not enough to siphon excess capital from the reinsurance system.

“Heading into Jan-1 renewals, barring any surprise major CAT events, pricing should decline.”

The analysts also explained, “As we progress through the tip of the yr, investors seem less optimistic on the reinsurance space. In our view, disciplined underwriting should help shield the reinsurers, making CAT losses more manageable as attachment points and tight terms & conditions proceed to carry strong.”

The discussion of whether that is excess capital within the reinsurance system and the way that would affect rates is a timely one.

Brokers have recently been forecasting an expectation that there will probably be around $10 billion of incremental property catastrophe reinsurance demand on the January 2025 renewal season.

But, with excess capital seemingly evident within the reinsurance system, is that sufficient to take in excess appetite from reinsurers and in fact the insurance-linked securities (ILS) market?

Readers will probably be aware that recent catastrophe bond issues have been pricing down and settling at attractive spread levels for his or her sponsors.

As we’ve explained, the catastrophe bond market went into the ultimate quarter of the yr with some excess money itself, from certain managers that freed some capital upfront of peak hurricane season, in addition to some that had raised some additional funds to deploy.

Because the cat bond market pipeline is all the time relatively slow to build-up again after peak hurricane season ends, this meant early deals that got here to market through October and November thus far have been met with high investor appetites for brand spanking new risk opportunities.

That has continued and almost every latest cat bond has priced inside guidance and below thus far this quarter, with some pricing at what seem quite tight spreads.

Still, spreads remain historically high and the general yield of the catastrophe bond market has remained also at a historically attractive level, however the trajectory has clearly been towards a slight softening of pricing within the cat bond market.

With some additional ILS capital being raised for personal ILS strategies, those focused on collateralized reinsurance, retrocession and industry-loss warranties (ILW), while we’re also told responses to reinsurance sidecar offerings available in the market are suggesting risk capital partners are being quite accommodating at the moment, it suggests that there could also be more excess within the system at the moment.

This must also play into the renewals, but its vital so as to add that in our conversations with ILS markets there stays a determination to sustain pricing at reasonable levels, while there continues to be little appetite to scale back attachment points and broaden terms.

One thing is definite, the tip of yr reinsurance renewals are more likely to prove competitive, which may add some pressure to prices.

With the catastrophe bond market leading the best way in providing priceless pricing indications, as is typical at the moment of yr, it’s clear that sophisticated cedents can have a chance to make use of capital sources in probably the most efficient way possible, to maximise their renewal outcomes and reduce among the renewal pressure that has proved difficult for a lot of over the past couple of years.

All of which suggests market sentiment has swung back to where it was in early September. While how much additional capital may come to market in time for the year-end, may very well be an extra wildcard with the potential to cause greater price pressure than currently anticipated.