From Barron's:
Pressure Won't Let Up on Reinsurer Pricing
Credit Suisse lowered earnings estimates by an average of 5% on the sector
Credit Suisse
Following discussions with nine reinsurers in Bermuda earlier this week, we find no reason to believe the growth trajectory of insurance-linked-securities reinsurance structures and the subsequent pressure it puts on pricing will dissipate for the foreseeable future.
More specifically, while we believe 10% to 15% pricing declines in Florida on June 1 will become less negative (i.e., down 5% to 10%) in the latter half of 2013 as both insurance-linked securities (ILS) market growth estimated at $5 billion year-to-date and traditional competition is less pronounced in non-Florida and non-U.S. geographies, we see no indication (outside of a wider-than $25 billion loss) for overall property-catastrophe reinsurance rate levels to stabilize in 2014.
We point out that our published earnings-per-share estimate declines are more pronounced, as we foresee a majority of the margin pressure being exhibited in business lines that are currently earning a higher margin than each insurer's respective consolidated portfolio (e.g., Florida business offers a few points more margin than a line on a program for a national insurer).
Accordingly, we are adjusting our prospective reinsurance EPS estimates downward by an average of 5% (with a range of 1% loss for Ace (ticker: ACE) to a 10% loss for RenaissanceRe Holdings (RNR)).
In the event of a large loss during the current wind season, we are also doubtful the "payback period" for most reinsurers would be attractive given our view that 1) ILS providers have access to ample capital, which can be more quickly deployed than start-up reinsurers ( KKR's (KKR) relationship with ILS market-share leader and closely held Nephila of London, for example); 2) well-capitalized Berkshire Hathaway (BRKA) is still largely on the sidelines in the U.S. property-catastrophe space; and 3) a majority of the largest global reinsurers (Munich [of Germany], Swiss Re [of Switzerland], ACE, PartnerRe (PRE), etc.) are sitting on ample excess capital positions....MORE
