The “fundamental secular pressures” that have been affecting the reinsurance industry over the last few years have not yet been fully priced into the sectors stock prices, according to analysts at Bernstein.
Pressures created in the reinsurance space, due to excess traditional reinsurer capacity, growing third-party capital from capital markets investors, consecutive benign loss seasons and restructuring of the way reinsurance is being purchased, continue to weigh on the sector.
You’d be forgiven for thinking that this was by now fully baked into reinsurer share prices, especially given the constant flow of news and analysis on the secular or structural pressures faced by the reinsurance industry.
But analysts at Bernstein believe that the pressure has yet to be priced into the share prices of leading reinsurers, largely due to the benign catastrophe loss environment which has been “inflating perceptions of normalized earnings” and also merger & acquisition (M&A) premiums driving bid speculation into the sectors shares.
This leads Bernstein’s analysts to insinuate that currently reinsurance share prices are overvalued, with issues such as lower pricing, more competition, the pressure from insurance-linked securities (ILS) and alternative capital not yet priced in.
The analysts say that they would look to become more interested in reinsurance as a sector if or when a hard market occurs after a major loss or series of losses.
The analysts note that reinsurance pricing is continuing to soften, albeit at slower pace and with an expectation of that slow down to continue in January at the renewals.
It’s also worth speculating that reserve releases have helped to buoy reinsurance share prices as well in recent times. If, as many expect, reserves do begin to become less of a factor given there haven’t been the losses to rebuild them, this factor could become less important.
It’s interesting to note this, as large private equity type investors remain interested in reinsurance. Meetings held at the recent Monte Carlo event with some of the world’s largest investors in insurance and reinsurance gave us the impression that investors appreciate the returns from reinsurance related investments, but are perhaps becoming less attracted to the enterprise and beginning to become more focused on the pure return of the risks underwritten.
Could this suggest that an ILS style investment opportunity with equity style liquidity may become increasingly attractive to large equity investors? Perhaps.
While share prices seem overvalued it’s likely that these investors will look to other areas of insurance, as evidenced by private equities continued push into insurance businesses that can offer longer term capital as well.
With returns on equity (ROE’s) still looking poor among many reinsurers, when normalised catastrophe loads are added and reserve releases are taken out, it could help to make some institutional investors look even more closely at ILS options as a way to access the sector without the enterprise risk.