Reinsurance prices to remain under pressure, sentiment negative: KBW

Analysts sentiment for the property & casualty commercial insurance and reinsurance sectors has moved from ‘less positive’ in the last quarter towards ‘outright negativity’ after the latest round of quarterly results, according to KBW.

In their latest note analysts at Keefe, Bruyette & Woods, led by Vincent DeAugustino and Meyer Shields, said that commercial and specialty insurers, along with the reinsurers, have underperformed the broader market through the latest earnings season, while the personal lines insurers outperformed the market.

Looking ahead, KBW’s analysts forecast that reinsurance pricing will remain under pressure, with no sign of the recent trends of excess capital and growing alternative capital pressure subsiding soon. At the same time the analysts expect mixed pricing ahead for the commercial lines sector as well.

KBW see the whole insurance and reinsurance sector as a stock picker’s environment, where there are still good opportunities for investors to tap the returns of the market through equity investments. However there are some instances of unjustified under-performance, leading KBW to recommend stocks where earnings growth prospects seem to outweigh the price pressure headwinds.

Reinsurers have typically displayed worsened core margins during second quarter earnings, but the KBW analysts explain that this isn’t surprising given the pricing pressure is most keenly focused on their core business lines.

Property catastrophe reinsurance pricing has “sustained its precipitous deterioration”, displaying the largest price declines and the greatest susceptibility to the growing competition and capital levels in the reinsurance market. As KBW analysts explained earlier this week, this has led some reinsurers to pile into specialty risks in an effort to secure more attractively priced reinsurance business.

KBW warns that this herd mentality, of rushing to secure premiums in areas where pricing has remained more attractive to date and the habit for commercial insurers and reinsurers to increase their appetite for specialty risks could lead to problems. “An industry-wide appetite shift is likely to produce lower-than-expected profitability, and the inherent elevated specialty risk carries its own pricing and reserving pitfalls,” the analysts wrote.

The outlook for reinsurance pricing has no reason to change at this point in time. Right now the market will be hoping that further pricing declines are moderate and not across the entire market, allowing those with specialty, large risks or a customised solutions focus to continue deploying capacity instead of continually pulling-back as they have in catastrophe risks.

Initial indications on reinsurance pricing sentiment for the January 1/1 reinsurance renewals suggest further price softening. If the softening market broadens and impacts specialty, casualty and the other lines of business that reinsurers have been using to offset the impacts on catastrophe reinsurance, the perfect storm of too much capital, not enough underwriting opportunities could continue.

Also read the following on previous reports from KBW analysts:

– As Bermuda reinsurers pile into specialty risk, expect commoditisation.

– Reinsurers accepting broader terms likely to experience painful losses: KBW.

– January 2015 reinsurance renewal rates expected to be down: KBW.