Morgan Stanley, a U.S multinational investment bank and financial services company, has reported that while reinsurance pricing remains robust this year, it is not as formidable as in 2023 as investors will be approaching the sector with caution based on current valuation multiples.
The firm noted that reinsurers experienced a pullback towards the end of 2023, prompting investors to scrutinise the factors that could drive the industry beyond the highs of the previous year.
A news report from Reinsurance News, an online industry-focused medium, indicated that the report highlighted that the peak of the pricing cycle and underwriting margin is a critical consideration, and this hesitancy reflects a more measured approach to investing in the space.
According to the investment bank, the majority of investors believe that the industry is approaching peak interest rates, adding that as short-term yields decline, reinsurers with heavier exposure to shorter-duration assets may face headwinds on earnings.
The company further found that some reinsurers had shifted their focus toward property catastrophe, a shorter-term business, and adjusted their investment portfolios accordingly, noting that the decline in asset duration raises concerns among investors, particularly as short-term interest rates are expected to decrease.
Another focal point in the industry highlighted by the firm in its report remained the question of whether the commercial pricing cycle has turned, with a recent rebound noted in overall commercial pricing.
On the options open to reinsurers to mitigate the challenges, Morgan Stanley suggests that a nuanced perspective is necessary, emphasizing that commercial pricing should be assessed on a per-line-of-business basis.
The report maintains an optimistic outlook for strong pricing in commercial property and commercial auto lines.
The investment banking firm projected that following high-profile data breaches in the latter half of 2023, the momentum in cyber insurance pricing was expected to remain robust.
However, it anticipated that the Workers’ Compensation and Directors and Officers (D&O) lines are anticipated to remain soft in the near term while social inflation, a potential headwind to losses and reserving in 2024 and beyond, may influence the pricing environment for these lines.
