While we harbour serious worries about the impact of negative rates on the good health of life insurers, we have no such qualms when it comes to Reinsurers. Their high-quality portfolios mechanically benefit from ever cheaper money. Our coverage includes : Hannover Rueck, Swiss Re, Scor, Muenchener Rueck.

This is presumably one of the mechanisms at work that justifies their outperformance: they can be regarded as bond proxies, quite literally so. They are also payers of coupon-like dividends, as the last thing a reinsurer wants to have is an unhappy shareholder which would be utterly needed in case of a very major accident forcing a recapitalisation.

From the low of 2009, when Swiss Re passed its dividend up to now, the pay out of the four reinsurers tracked by AlphaValue has quadrupled to nearly €5bn.

Ever higher-flying Reinsurers

The accelerated rise of their share prices is creating a new valuation paradigm though as the universe is trading at a premium to its book value. Rather than using P/Book (2019 at 1.25x), we plotted the actual shareholders’ funds and market cap. Remember that the industry took a bath in 2017 and 2018 on destructive storms while it continued to pay out, hence the contraction in total equity. It is clear that investors have donned their rose-tinted glasses.

Reinsurers’ equity (pink) vs. market cap (blue)

Can the bond proxy thematic be the only engine of this enthusiasm? May be not. One complementary reading is that the sector is a beneficiary of global warming as this mechanically grows the volume of business. The capital requirements of the industry make it a natural oligopoly which has the resources to work on fast-changing risk algorithms and thus to contain risk taking/to push up treaties, i.e defend prices. Time will tell whether this ideal volume /price combination is a lasting one or whether environmental risks become so high that states step in and public money changes the economics of the reinsurance industry.

In the meantime, the sector offers an upside potential of 9% in line with the global market. It is on a strong sentiment momentum that may last.  And who can refuse a 5% yield on a quality bond portfolio (while it lasts).

Reinsurers’ valuation fundamentals

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