Global investment firm Bernstein has advised investors to be cautious of reinsurance, as the sector continues to fill with alternative sources of capital, and remains rife with competition, including from insurance-linked securities.
In a new report, titled “U.S. Insurance: Who’s Afraid Of Negative Pricing? With Solid Fundamentals, We’d Buy The Dip On A Noisy Quarter,” investment and portfolio management firm Bernstein discusses persistent headwinds facing the reinsurance market.
“We do not expect any relief on pricing for some time to come. With such fundamental long term headwinds, we see stocks in this sector swimming upstream,” notes the report.
The company feels that reinsurers are likely to benefit during the quarter from low global catastrophe losses, but remains wary of a market that has seen rates deteriorate throughout 2014 and continue the trend in 2015.
Typical of the current market consensus, Bernstein warns of further stress on pricing, “with reinsurance intermediaries predicting 20+% growth YoY (year-on-year) of alternative reinsurance capital through 2018.”
According to reinsurance broker Aon Benfield, by the end of 2014 the volume of alternative reinsurance capital within the international reinsurance market reached $64 billion, up 28% on the previous year.
Leading the reinsurer to later predict that by the year 2018 the amount of alternative capital in the reinsurance space would reach a staggering $150 billion.
In response to the mounting pressures Bernstein notes the trend of merger & acquisition activity sweeping the market, as firms seek scale and diversification to help them navigate tough conditions.
Ultimately, Bernstein feels that light catastrophe loss periods are masking the fundamental issues facing the re/insurance sector, and sees further pricing declines throughout the coming months.
In fact, the analysts say to avoid certain reinsurance stocks altogether as, “with secular pressures for Reinsurers that will likely get worse before they get better, we’d avoid the Bermuda names altogether.”
With much of the talk regarding the current, tough reinsurance space circulating around the influx of alternative and traditional capital, the need for innovative risk transfer solutions becomes ever more apparent.
By putting the ample capacity to work in developing and developed regions of the globe through innovative, efficient products, some of the pressures facing global economies and the international re/insurance market could be somewhat alleviated.