RenRe and Arch praised for "deft cycle management" by BofA

It may be a hardening market with plentiful reinsurer-friendly signals, but not all reinsurers necessarily positioned themselves to benefit equally, analysts at  Bank of America suggested in its latest research to markets.

All signs and signals from the January 2022 renewal season say that reinsurers benefitted again from strong pricing power. One key price index from Guy Carpenter suggested a 10.8% increase, twice the prior year's gain.

Constraints on the once-overflowing ILS market, the five-year history of nat cat losses, rating agency sabre-rattling over climate-based capital requirements, and heady claims inflation have all proven price-supportive.

But early reports from brokers like Guy Carpenter, Gallagher and Howden also warned of a highly differentiated market, with reinsurers often accepting much lower price gains while herding into safer segments. In turn, this caused rates to skyrocket in loss-hit lines from which they felt compelled to steer clear.

It's not enough to know that the broad market is up, BofA analysts warn: you have to know who was positioned to capitalize. The answer: very few reinsurers in the larger herd had shown the "deft cycle management skill" to grow materially in the hard market to date.

Only the 83% two-year hard market rise in net written premiums for RenaissanceRe and a 73% gain for Arch Capital really show a well-leveraged cyclical strategy where growth is more than price gains, BofA said of reinsurers in its coverage universe. A 41% gain for Everest Re also got a tip of the BofA hat.

"With few exceptions, the rest of the commercial insurance market place has spent the last two years underwriting rate increases in notable excess of net premium written growth, which essentially hints at declining exposures," the report stated.

BofA sees timing issues, size, sentiment and regulators having mixed up the calculus and thrown some reinsurers off the "classic soft-to-hard market cycle strategy” of soft-market-light to hard-market-heavy.

Timing issues variously saw some players maxed out on select lines prior to hardening, showing shrinkage on select COVID-impacted lines or walking in with a market share "already too large to easily grow," authors noted.

Sentiment problems here and there could include "board trepidation following poor 2017-2019 results and refusing to give management the capital to switch up strategy" or just plain old "inexperience" given the 20-year lag to the last notable hard market.

Rating agencies may have added their several cents worth with "model inefficiencies" that put capital charges on premium volume instead of exposure leading to a capacity constraint.

In its accompanying 2022 recommendations, BofA says it generally likes reinsurance over primary carries (as well as personal over commercial, life over P&C and underwriters over brokers). Top picks include Arch Capital, Everest Re and RenaissanceRe.

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