October 3rd, 2013

Convergence Capital’s Effect on Valuations

Posted at 1:00 AM ET

Figure F-4 highlights the relative share price performance of the reinsurance sector since January 2012, which can be considered the start of the new wave of convergence capital. The clear upward trend has benefited investors during this time.

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The charts also show that while valuations were starting from a relative low point following the global financial crisis and significant catastrophe losses in 2011, the reinsurance sector has significantly outperformed the benchmark equity indices over the last 18 months. This outperformance has occurred despite challenging macroeconomic factors, including low interest rates, benign premium growth in mature markets, softening pricing and increased competition in the high margin property catastrophe market.

Positive sentiment from equity market analysts and investors continue to drive valuations higher, likely reflecting the recent improved economic outlook, absence of major catastrophe losses and confidence in (re)insurers‘ management teams to adapt to market conditions and deliver a positive total return to shareholders in excess of the cost of capital. The second quarter 2013 reporting season showed that good returns continued to be made across the sector following a period of relatively light catastrophe activity. However, there were signs of pressure on premium growth and volatility in the investment portfolio.

Figure F-5 highlights the relative valuation differential between the reinsurance markets of Europe and Bermuda, compared to the more diverse London and U.S. specialty markets.

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While there has been a pick-up in valuations across all (re)insurance markets since early 2012, specialty class markets in London and the United States continue to attract premium valuations. This is a reflection in part of the lower perceived earnings volatility in such specialty markets but it is also indicative of the positive pricing and competitive differential opportunities that exist in many specialty underwriting classes. With increasing competitive pressures from the convergence market building on reinsurers, a number of companies have expanded their platform beyond reinsurance and into specialty insurance.

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