The reinsurance industry appears strong heading into the worst of the hurricane season, and the group should remain solid into 2008, according to an investment bank analysis.

In a research report for Bank of America, analyst Kevin O'Donoghue observed that, historically, catastrophes have not affected the long-term stock performance of reinsurers but have increased the short-term volatility of the companies.

He noted that while losses impede the book-value per-share growth, they also increase growth and “return-on-equity expectations, resulting in higher multiples for the stock.”

Over a seven-year stretch, Mr. O'Donoghue noted reinsurers have bounded back from losses. Most notable was the 2005 hit from hurricanes and other losses of $83 billion, 70 percent higher than previous years. However, strong performance followed in 2006 as a result of the hard property market. He also added that the likelihood of a repeat of 2005 “is low.”

Current market conditions “afford reinsurers the opportunity to write business at targeted returns above the long-term average” despite declining premium rates, he continued. Reserves are also strong, and the “possibility of reserve releases outweighs the potential for adverse development” presently. Reinsurers are also benefiting from investment income growth, which adds to their earnings.

“We have a positive view of the reinsurance group,” he wrote, adding that strong underwriting margins on property and casualty reinsurance and improved risk management “should drive book-value growth.”

Special Reports /

Analyst Gives Reinsurers Strong Marks

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