The share value of a host of Bermuda re/insurers hit a year-long high this month as favourable year-end results, improving margins and a bullish stock market helped to buoy valuations.
Share prices in the Bermuda market have climbed dramatically over the past year, with mean share valuations up by around 27.5 percent on this time last year. Many had been concerned that the industry had been trading below book value for some time, with price to book averaging around 0.7 or 0.8 for a number of Bermuda players. Current share prices paint a rather rosier picture for the Bermuda market however and appear to be part of a long-term trend towards strengthening valuations.
Commenting on the improved valuations to Bermuda:Re, Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers said: “insurance stock prices are cyclical. They’ve been at the bottom for so long it appears that investors have decided there is a momentum play to be made with insurance stocks.”
“Re/insurers have managed to grow capital in spite of the extraordinary cat losses of 2011 and Hurricane Sandy – now viewed as the third largest US insured cat loss. Investors see this as a sign that underwriters know what they are doing.”
Talking with Bermuda: Re about the buoyancy of recent Bermuda valuations, Amit Kumar, analyst at Macquarie Securities, added that a bullish investment environment, improving margins on reinsurance business, successful 2012 results in spite of Hurricane Sandy and the return of excess capital to shareholders had all played their part.
He added that reserve discussions regarding reinsurers’ ability to sustain profitability in the face of diminishing reserve releases had proved to be largely unfounded. “There have been no ticking time bombs” he said, with the industry’s ability to work through a tailing off of reserve releases encouraging greater investor confidence in the sector’s long-term profitability.
Kumar said that current valuations on a price to book basis were still below historical highs as well as relative to other financial sectors such as banks. The sustained low interest rate environment had brought about a “reset” in the market, with investors increasingly willing to accept lower returns. Reinsurers have been among the beneficiaries as institutional investors such as pension funds explore opportunities in third party capital and bricks and mortar reinsurers.
Improved valuations may however herald the on-set of a fresh round of M&A activity, which has been stymied in recent years by low valuations. That said, there were a number of acquisitional moves in 2012 in spite of the valuation environment, suggesting that 2013 could yet prove a bumper year for deals.
Bermuda re/insurance, financial markets, stocks, valuations