Bermuda’s property and casualty re/insurers will likely see their profit margins come under pressure in 2014, according to stock research analysts Keefe, Bruyette & Woods (KBW).

In a report published this week, KBW said the sector faced pricing pressure in reinsurance and slowing increases in speciality insurance lines.

While most Bermuda insurers have seen strong growth in their stock prices this year, aided by a lack of major claims-generating events, KBW expects a tough and competitive market for the companies next year with limited opportunities for growth.

“The Bermuda sector escaped 2013 largely unscathed by major catastrophes, leading to strong reported returns on equity and stock performance, but we believe that the favourable weather masked some underlying margin pressure,” stated the report.

KBW’s analysts expect most of the growth in the P&C sector to come from commercial lines where rates continue to increase. On the reinsurance side, while KBW expects property-catastrophe rates to decline, it sees some growth in other areas.

“Many reinsurers have noted tepid demand, as cedents want to retain more business,” KBW stated. “We expect overall gross premium growth of approximately five percent in both 2014 and 2015, as the sector expands into new business lines and further grows primary writings to offset reinsurance pricing pressure.”

Excess reinsurance capacity and favourable 2013 loss experience will keep reinsurance rates under pressure next year. “Several non-US 2013 events could support some regional catastrophe rate stabilisation, but the overall trend is for continued pressure, especially if third-party capital enters the fray,” KBW added.

The boom in “third-party capital” in the reinsurance market, including catastrophe bonds and other insurance-linked securities, which has put risk on the shoulders of capital market investors and away from traditional reinsurers, is seen growing.

“Non-traditional capacity now represents approximately 14 percent of global catastrophe limit purchased, according to Guy Carpenter,” KBW states. “Nearly $10 billion of additional capital entered the market over the last 18 months through catastrophe bonds, ILWs, and collateralised vehicles, drawn by relatively attractive yields and non-correlated return characteristics.

“We expect non-traditional reinsurance capital to capture more market share as more cedents pursue cost-effective reinsurance programme diversification.”

Last year, KBW estimated, that roughly 70 percent of the Bermuda group’s earnings were spent on share buybacks, helping to bolster earnings per share and stock prices. But with the sector now trading above book value, share buybacks have become less attractive and KBW believes more companies will consider special dividends as an alternative way of returning capital to shareholders.

KBW picks two Island-based companies, Axis Capital and PartnerRe, to outperform the market, with a price target of $55 for Axis and $115 for PartnerRe.