Shares of property-casualty reinsurers, beaten down with other financial stocks in recent months, are poised to benefit from brighter business prospects in 2009.
Reinsurers are likely to be bigger beneficiaries than their insurance counterparts because they can more easily shift to writing policies where prices are increasing, specifically along specialty lines such as aviation, marine and financial directors’ and officers’ coverage.
“While a reinsurance pricing cycle of some magnitude seems very likely in 2009, a corresponding cycle in primary commercial is less certain,” Todd Bault, an analyst with Sanford C. Bernstein, wrote in a client note on Monday. Goldman Sachs analyst Chris Neczypor said recently that he favors reinsurance stocks over other financial stocks partly because valuations have fallen below historical levels. He also cited the sector’s "relative lack of problematic assets" to impair book value.
Reinsurers contract with insurers to assume some of the risk from policies sold to corporations and individuals. The firms are expected to charge more when many policies are renewed throughout 2009 because of a spike in demand, and a need to raise rates to be commensurate with the risk of losses. However, a number of analysts say reinsurers’ fortunes may see the greatest improvement in the second half of the year because many will keep capacity in check for when property-catastrophe policies for hurricane-prone areas are renewed mid-year.
“Property focused reinsurers with relatively clean balance sheets look the best positioned to benefit from a changing environment,” said Merrill Lynch analyst Jay Cohen in an investor note earlier this month. Among those poised to benefit are Validus Re and IPC Holdings, both reinsurers based in Bermuda, he added.
Catastrophes such as hurricanes Ike and Gustav, which caused havoc along the US Gulf Coast earlier this year, are expected to cost insurers about $45 billion in 2008, just below the $50 billion record paid out by the industry in 2005. The losses, in tandem with heavy investment losses in 2007, are expected to force some insurers to scale back on business to preserve capital, and buy more reinsurance coverage for the policies they do sell.
RECOVERY IN PROGRESS?
The Dow Jones US Reinsurance Index, comprised of US and Bermuda-based reinsurers, fell to a lifetime low in October. It has gained since but is still down 20% this year. On a price-to-book basis, all but one of the reinsurers that make up the index are trading at a discount to book value.
Some of those in the biggest slump are Max Capital Group and Aspen Insurance Holdings. Only RenaissanceRe, a reinsurer that specializes in property coverage, trades at a premium to book value. These reinsurers are all based in Bermuda, a British colony that has grown into one of the largest reinsurance markets over the last few decades.
UBS analyst Brian Meredith in a note to clients earlier this month said Aspen’s low valuation makes this a good point for investors to buy shares. “With less volatile returns due to diversification and a conservative investment portfolio, we would expect AHL (Aspen’s) valuation to expand relative to its peers over the next 12 months,” he said. “If there is an area of business that looks like it is going to be priced more profitably, chances are we have a team with a risk appetite and capital in place to take advantage,” Aspen CEO Chris O’Kane told Reuters in a recent interview.
Large European reinsurers such as Swiss Re and Munich Re also say they expect to profit from higher reinsurance pricing in the new year. Swiss Re said on December 22 it had entered into a $1.5 billion long-term letter of credit facility, giving it room to take advantage of opportunities that may arise. The reinsurer has been badly hit in the past year by writedowns on investments. (Reuters)