Weakness in Reinsurance Stocks
The following information does not seem to be well known, so the reinsurance stocks like RNR may have some additional downside even though they look pretty inexpensive. Perhaps the best time to buy them is when this news becomes widely disseminated and everybody freaks out.
Details of Expected Changes To Florida Hurricane Catastrophe Fund -- RNR Appears Most Exposed. Property reinsurance stocks such as RNR (2-EW, $52.81) have been hurt recently in our view based in part on expected changes to the Florida Hurricane Catastrophe Fund that would crowd out private market reinsurers from offering coverage at the low-and-high ends of this facility. We believe this is because Florida's Governor Crist is pushing hard for rate relief for buyers of Florida homeowner's insurance. Also weighing on the reinsurers, in our view, is exposure to European winter storm Kyrill, which catastrophe modeler AIR Worldwide ests could result in insured damage of $5-$10B. Based on pending legislation in Florida, it appears increasingly likely that Florida private market reinsurers (including RNR) will be pushed out from offering residential property catastrophe reinsurance coverage. Based on our conversations with industry lobbyists, our understanding is that this legislation is highly likely to pass. In 2006, the Florida Hurricane Catastrophe Fund (FHCF), a state funded residential insurance facility, provided reinsurance coverage to primary homeowner's insurers for between losses of $6B - $16B with 10% coinsurance. In 2007, the proposed FHCF coverage is substantially increased to cover losses of $3B - $35B with 10% coinsurance. Previously, the increased coverage was provided by the private reinsurance mkt. As a result, the private reinsurance mkt in 2007 will likely write much less reinsurance coverage for residential exposures in Florida. Further, primary homeowner's insurers like Allstate (ALL, 2-EW, $63.00) are likely to be required to pass along savings from reduced reinsurance costs (now estimated at about 2% rate-on-line, a substantial reduction) to their customers. Our view on the reinsurance stocks with substantial Florida exposure like RNR is that the anticipated legislative change in FHCF coverage could hurt its premium volume and underwriting results in years with light Florida hurricane losses. RNR currently trades at 1.5x our 4Q06 book value est of $34.15, which is only slightly below the long term median multiple of 1.6x.
Souce: Lehman
Details of Expected Changes To Florida Hurricane Catastrophe Fund -- RNR Appears Most Exposed. Property reinsurance stocks such as RNR (2-EW, $52.81) have been hurt recently in our view based in part on expected changes to the Florida Hurricane Catastrophe Fund that would crowd out private market reinsurers from offering coverage at the low-and-high ends of this facility. We believe this is because Florida's Governor Crist is pushing hard for rate relief for buyers of Florida homeowner's insurance. Also weighing on the reinsurers, in our view, is exposure to European winter storm Kyrill, which catastrophe modeler AIR Worldwide ests could result in insured damage of $5-$10B. Based on pending legislation in Florida, it appears increasingly likely that Florida private market reinsurers (including RNR) will be pushed out from offering residential property catastrophe reinsurance coverage. Based on our conversations with industry lobbyists, our understanding is that this legislation is highly likely to pass. In 2006, the Florida Hurricane Catastrophe Fund (FHCF), a state funded residential insurance facility, provided reinsurance coverage to primary homeowner's insurers for between losses of $6B - $16B with 10% coinsurance. In 2007, the proposed FHCF coverage is substantially increased to cover losses of $3B - $35B with 10% coinsurance. Previously, the increased coverage was provided by the private reinsurance mkt. As a result, the private reinsurance mkt in 2007 will likely write much less reinsurance coverage for residential exposures in Florida. Further, primary homeowner's insurers like Allstate (ALL, 2-EW, $63.00) are likely to be required to pass along savings from reduced reinsurance costs (now estimated at about 2% rate-on-line, a substantial reduction) to their customers. Our view on the reinsurance stocks with substantial Florida exposure like RNR is that the anticipated legislative change in FHCF coverage could hurt its premium volume and underwriting results in years with light Florida hurricane losses. RNR currently trades at 1.5x our 4Q06 book value est of $34.15, which is only slightly below the long term median multiple of 1.6x.
Souce: Lehman
posted by Never-Limp at 11:44 AM
1 Comments:
I would say today = everybody freaking out
though i'm really starting to hate re-insurers
a) they sell off when there's no storms because everyone says pricing will get hurt
b) they sell off when there is a storm because they will have to pay claims
apparently b doesn't affect a which is the part i'm not following
hopefully rnr gives some guidance when they report and they we can better asses the florida thing
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