Investors favor reinsurance stocks
Reinsurers’ underwriting is impressing the market.
This article appears courtesy of Reactions
Insurance-savvy investors are looking more favorably at reinsurance stocks than those of primary firms, according to one investor, because they are demanding appropriate rate increases at the same time as tightening up their underwriting guidelines.
Bermudian reinsurers in particular are promising because the island is attracting more premium from international markets than ever before and has a benign regulatory environment, says Mike Morrissey, chairman and chief executive of Firemark Investments, a New York-based investment advisory firm specializing in insurance.
“Reinsurers are highly represented in our portfolio at present,” he says. “As I talk to reinsurers around the world, I am impressed with how they are reengineering their underwriting processes and managing their exposures.”
Morrissey believes reinsurers’ use of capital market mechanisms such as securitization and sidecars is, on balance, a boon for the industry. “To be able to use your underwriting capability to underwrite a risk and then move it to the capital markets, or have the capital supporting it in a sidecar, has the potential to significantly enhance companies’ returns.”
But he adds: “That is not to say that every company has the underwriting capability to do that, which is why we short some of them.” He declined to comment on the firms whose shares his company has sold short in recent months because of their exposure to unstable sidecars.
Firemark invests in both established players and newer firms. Its main activity is its global insurance-focused hedge fund, Firemark Tiger Fund, whose investments are two-thirds property/casualty and one-third life and health.
On the primary property/casualty side, Morrissey believes specialty commercial lines companies offer investors the greatest upside. Those that write only personal lines, he says, have seen such favorable loss ratios that they will soon experience widespread softening and a deceleration of growth. As a result, Firemark has chosen not to invest in them for now.
On the life and health side, Firemark prefers firms that sell the most innovative long-term savings and investment products, such as variable annuities, and have the asset management capability to support this.
Competition in the US market is so fierce, continues Morrissey, that life and health writers with the greatest potential are those with a strong foothold outside North America.