One of Bank of America’s leading re/insurance sector analysts Jay A. Cohen downgraded Bermuda based global insurance and reinsurance group AXIS Capital Holdings Limited from Buy to Neutral in a report published yesterday. The analyst becomes the latest to cite reinsurance pricing pressures as a potential earnings headwind.
In the report, the analyst wrote;
“We are lowering our rating on Axis to Neutral from Buy due to valuation and a more challenging environment in its reinsurance operation. Axis shares are up almost 36% year to date and are within 2% of our price objective. The stock is now trading at 12% above the estimated 2Q book value, a valuation that seems fair given an expected ROE of 9.5%-10% for next year (after taking into account estimated unrealized losses in the 2Q). Although we expect a growing earnings contribution from the company’s A&H unit, pricing pressure in catastrophe reinsurance should present a headwind for the earnings. Reinsurance accounts for just over 50% of Axis’s net written premiums and catastrophe reinsurance makes up 20% of the reinsurance book. Although this contribution is quite manageable, the expected margins in the cat book are above the rest of the reinsurance business suggesting that pricing pressure in this could have an outsized impact on operating earnings.”
It seems that almost all the major Wall Street analyst firms have now weighed in on the reinsurance sector regarding the recent pricing pressures, which have been caused to some degree by the inflows of third-party capital into the ILS and reinsurance convergence space. The strong capitalisation of the reinsurance sector is also a factor which weighs on profitability for some reinsurers.
AXIS Capital is a strong re/insurance firm, very capable of riding out any rate environment changes as it adapts to the new paradigm of alternative and non-traditional reinsurance capacity and solutions becoming more competitive in terms of price and structure. In fact AXIS Capital has hired a capital markets specialist to help it get to grips with new market dynamics. Interestingly, that hire in June was one Ben Rubin, hired as Executive Vice President, Capital Markets at AXIS Capital, who was previously in investment banking at guess who? Bank of America Merrill Lynch.
We wonder when the analyst reports are going to move their focus away from price declines to thoughts on how reinsurers will adapt to the new environment and remain Buy rated. Expect to see more news coming from major reinsurers about how they intend to capitalise on non-traditional reinsurance capacity over the coming months as they seek to reassure investors and partners. We fully expect to see some innovative initiatives coming from the likes of AXIS Capital and in fact the re/insurer has for the first time seen fit to tap the capital markets for catastrophe bond cover with Northshore Re in the last week.