Morgan Stanley (NYSE:MS)’s take from the Global Reinsurance meetings in Monte Carlo is that reinsurance pricing would continue to trend lower, and as at January 1, renewals could be down from 0-15% on pricing.
January 1 renewals account for over 50% of annual reinsurance business, and this is an early indication of a decline in pricing power through 2014, subject of course, that there is no major loss event of a size larger than $50B.
It may be noted that the outlook for 2014 builds upon a previous loss of pricing power witnessed in 2013 when Superstorm Sandy failed to set off pricing gains. A relatively unchanged pricing at the beginning of 2013 tapered down through 2013 and was -15% by the June renewal.
Fading power price
The main reason for the fading pricing power is the build up in reinsurance capacity due to
– abundant capital infusion from traditional reinsurers , as well as alternative capital suppliers such as pension funds and hedge funds
– strong earnings and below average claims loss experience have resulted in growing reinsurance capacity
– rising broker driven facilities
The advent of alternative capital, currently estimated at $40B or about 15% of global reinsurance capacity is pressuring pricing. According to some estimates this capital could reach over $100B in coming years. ‘Investment-oriented’ insurers such as Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) and Third Point Reinsurance Ltd (NYSE:TPRE) are looking to garner “free float” liquidity to boost their returns.
Structural shift in reinsurance
The entry of alternative capital is being viewed as a structural shift in reinsurance business.
In addition, so far the Q3 catastrophe losses have been muted with most of the US hurricane season over. Morgan Stanley anticipates higher EPS to manifest in 2H13 and the possibility of an increase in buybacks and dividends.
Another issue for reinsurers is the impact on their profitability due to rising yields. According to the market view life insurers are benefited most in such a scenario while reinsurers depend more on pricing and underwriting returns. Morgan Stanley (NYSE:MS) point out, however, that a rising rate situation benefits reinsurers because they draw the bulk of their profits from investment income – however this is a short term negative but a long term positive.
Morgan Stanley’s top picks in the reinsurance sector are Amlin and Munich Re in Europe and RenaissanceRe Holdings Ltd. (NYSE:RNR) and Third Point Reinsurance Ltd (NYSE:TPRE) in the US.