By Rebecca Delaney

June 5 - (The Insurer) - Nominal probable maximum loss $(PML)$ exposures for U.S. wind have grown meaningfully since the onset of the hard property catastrophe reinsurance market in 2018, Moody's said on Wednesday.

U.S. wind PMLs have increased at a compound annual growth rate $(CAGR)$ of 58% over the past seven years, the rating agency and modelling firm said in a report.

On a nominal basis, the report said aggregate PMLs began to grow meaningfully after the January 2018 renewals, which marked the end of the soft market for property cat reinsurance.

It added that despite a moderate pullback in pricing this year, reinsurers are generally still eager to deploy capital in property cat reinsurance (particularly U.S. wind) owing to favourable expected returns.

U.S. wind dollar exposure has grown by 58% over the past seven years among a cohort of eight reinsurers (Munich Re, Swiss Re, Hannover Re, Lancashire, Everest, SiriusPoint, Arch and Axis), representing a CAGR of 6.7%.

U.S. earthquake dollar exposure increased at a CAGR of 5.3% during the same period, with European wind at 1.5%.

As well as higher property cat reinsurance pricing, Moody's attributed the growth in PMLs to population growth in cat-prone areas with high value concentrations, higher property reconstruction costs and social inflation.

Moody's found that reinsurers' PMLs as a percentage of equity capital were roughly flat year on year for U.S. wind and earthquake and European wind, but declined for Japanese wind and earthquake as shareholders' equity – excluding the effect of accumulated other comprehensive income – in the sector grew.

The decrease in Japan earthquake over the period (-2.1%) primarily reflects reduced PMLs reported by Swiss Re and Axis, the report said.

Moody's added that PML disclosures underline varying risk appetites and capital risk allocation priorities among the eight reinsurers. For those that do provide transparent catastrophe risk exposure data, these disclosures are typically occurrence-based, pre-tax, net of reinsurance/retrocession and include both windstorm and earthquake exposures in the U.S. and Japan, as well as windstorm exposures in Europe.

"Given the still attractive pricing for property catastrophe risk, a number of companies have significantly increased their U.S. wind PMLs over the past several years as a percentage of equity capital, including Munich Re, Everest Group and Arch Capital Group," said the report.

"In contrast, Axis Capital’s significant reduction in catastrophe exposure primarily reflects the company’s decision to exit property catastrophe reinsurance in mid-2022."

The report concluded that as reinsurance pricing moderates with more market capacity (the January 2025 renewals saw largely flat pricing for lower-attaching layers, with some downward pressure for more risk-remote layers), heavy reinsurance losses from the Los Angeles wildfires could provide some support to pricing.

However, Moody's added that the mid-year renewals in the U.S. are likely to see continued price decreases at higher return periods as more capacity enters the market.

"That said, demand for reinsurance coverage remains robust and reinsurance terms and conditions generally remain firm, with primary insurers retaining more risk at lower return periods," the report concluded.