Equity analysts at investment banking group UBS say they are now more negative on the European reinsurance sector, after January renewals saw prices decline further than expected and with fundamentals across the sector looking shaky.
With risks on the horizon for the major European reinsurance firms and the London market players, UBS highlights threats to earnings and valuation multiples, which have led the bank to downgrade Swiss Re to a Sell and SCOR to Neutral today.
The much hoped for rate stabilisation at the key January reinsurance renewals did not materialise, resulting in further declines, albeit at a little slower pace, compounding the last four years of reinsurance price declines, the analysts explain.
UBS believes that the outlook on reinsurance pricing remains unchanged and that while declines will not be of the magnitude seen in recent years, while the market remains over-capitalised and free of really major losses the decline is likely to continue to erode margin from the market.
The market still forecasts earnings though, but UBS highlights the fact that reinsurers and London market players are increasingly reliant on reserve releases in order to make a profit.
“We estimate that companies are over-earning vs. normalised levels by 10-20%,” the UBS analysts explain, warning that “higher claims inflation could erode reserve releases, potentially providing another layer of downside risk.”
As well as reserves, the lengthening tail of the reinsurance market, as larger players increasingly shift into casualty type risks, poses risks as well, with reflationary pressures a possible cause of future claims inflation.
Looking further ahead, the analysts say; “We expect pricing to remain under pressure until reinsurers feel real pain in headline ROEs.”
UBS’s analysts now give Neutral or Sell ratings to all of the European reinsurance and London market re/insurers that they track, and based on the pessimistic outlook there is not much sign of the ratings improving, in fact it would seem more likely that if conditions persist more of the reinsurers may find themselves deemed a Sell.
The analysts explain that in Swiss Re they see a company more at risk due to higher catastrophe exposure and fewer levers to pull, adding that its “earnings / capital returns are more beholden to fortune than peers.” They also note a higher risk due to future claims inflation potential, question marks around the profitability of casualty growth and concern on the sustainability of share buy-backs in the future.
UBS does not forecast dramatic earnings reductions from 2017 to 2020, but explains that its estimates for the re/insurers are up to 10% below market consensus, adding that while capital returns have helped to support prices of reinsurers lately, this cannot be relied on as much and there are risks going forwards.
