Despite persistent and widespread headwinds in the European reinsurance industry continuing into 2017 analysts at J.P. Morgan believe the sector remains attractive, and warns that reinsurance is still undervalued by both investors and the marketplace.
There’s no escaping the fact that in the near-term reinsurance prices are likely to continue falling, albeit at a reduced rate that in the past, in response to overcapacity, competition, and the benign loss environment. Ultimately driving down profitability for both European and international reinsurance firms.
Owing to the influx of capacity from both traditional and alternative sources the European reinsurance industry remains very well capitalised, which, combined with its “clear focus on economic capital generation, and a high translation into capital return,” says J.P. Morgan, should continue to be attractive to investors.
However, even at 10.4x FY18 EPS (earnings per share) analysts at J.P. Morgan believe the reinsurance sector continues to be undervalued by the market.
But it’s not just the investor value of the reinsurance sector that remains undervalued, or under appreciated, with J.P. Morgan underlining the importance and necessity of reinsurance capacity in the global risk transfer value chain.
“We see reinsurance as a vital component of the global insurance value chain, with rising insured values, deeper insurance penetration, and continued demand for capital efficient solutions all likely to deliver growth. In addition, we believe the sector’s capital position is stronger than ever, which we believe will continue to underpin some of the highest total capital returns in the market,” says J.P Morgan, in a recent Equity Research report on the European reinsurance industry.
Insurance penetration continues to expand in developed regions for certain existing coverages and also new exposures such as cyber and terrorism, while emerging markets are seeing rising asset classes and the growth of the middle class, all of which is resulting in greater demand for insurance capacity.
As noted by J.P. Morgan, greater insurance penetration will require greater reinsurance capacity to support the risks and balance sheets of insurers, and while the marketplace might be pressured at the moment, at some point losses will pick up and the market will start to turn from its softening state.
“Longer term we believe the fundamentals of the reinsurance sector remains healthy,” says J.P. Morgan.