NU Online News Service, June 7, 1:30 p.m. EDT
The vast majority of reinsurers globally are entering the U.S. hurricane season trading below book value, making bondholders in the sector particularly vulnerable, Moody's Investors Service warns in a report released today.
"For an industry that is renowned for raising equity capital after major catastrophes or downturns, the historically low price-to-book ratios are raising doubts about reinsurers' ability to recapitalize if faced with major catastrophe losses," Moody's said in a statement.
"If they cannot [recapitalize], bondholders would be left with less credit support," the agency added. "This is the biggest concern heading into what many predict may be a very active hurricane season, and a major reason why Moody's changed its outlook on the global reinsurance sector to negative last September."
Kevin Lee, a senior credit officer at Moody's, added that "the past 18 months have been highly unusual if not unprecedented for reinsurance stocks, as nearly all reinsurers continue to trade below book value." He noted that on average the sector is trading at 0.8 times-book value, which he said is "worse than other insurance sectors and global financials."
The report notes that the low price-to-book ratios "may signal that reinsurers are currently out of favor versus other asset classes, or investors may be discounting returns at a higher rate than what the sector can generate in the face of weakening industry fundamentals."
Mr. Lee warned that "a bigger issue still is that the industry's investor base is very concentrated," noting that the report shows the top-20 shareholders often make up anywhere from 50-to-75 percent of total shares outstanding.
"Additionally some of the largest shareholders in the sector have been selling down their positions nearly across the board or have become more selective, according to SEC filings," he added.
Moody's observed that "reinsurers have been trying to counter the low price-to-book ratios and weakening industry fundamentals in one of four ways, with varying levels of success." The four listed were:
o Buy back shares.
o Issue debt to buy back shares.
o Merge.
o Move the holding company and list shares on foreign exchanges in the hope of diversifying the investor base over the long term.
As a precaution, some reinsurers are also developing "break-the-glass" plans in case catastrophe losses wipe out large amounts of capital, according to Moody's.
"Unlike after Hurricane Katrina, equity capital may not be widely accessible this time around, and limited capital may be rationed to the companies who are best prepared," the agency warned.
The report identifies some of the largest institutional shareholders in the sector and the change in their positions over the past quarter.
The report–"Reinsurers Enter Hurricane Season Trading Below Book: Will Investors Be There to Recapitalize?"–is available on www.Moodys.com.
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