Bermuda rates could increase mid-2019 from ILS capacity pullback: Fitch

Sizeable increases in retrocession rates driven by a decreased demand in the insurance-linked securities (ILS) market could indicate that reinsurance pricing in Bermuda may regain momentum in mid-219 when accounts that had a greater catastrophe loss impact are up for renewal.

This according to Fitch Ratings' Bermuda 2019 Market Update, which has maintained a stable outlook on both US property/casualty global re/insurance market sectors, which includes Fitch's coverage of Bermuda market re/insurers.

Bermuda's ILS market was more hesitant to reload following sizable upward revision to 2017 losses - in particular from Hurricane Irma, along with above-average cat losses in 2018 that added to trapped capital.

Markel CATCo in particular had contributed to reduced levels of capacity as they were forced to scale back amid an investigation by US and Bermuda regulators, Fitch noted. The ratings agency expects this slowdown to be temporary, however, with capital provided by capital markets continuing to grow.

Fitch suggested that Bermuda' re/insurance model continues to be tested in the face of challenging market conditions, along with heightened cat losses and substantial US tax reforms.

2018 was an above-average year in terms of natural catastrophe losses, which reached $80 billion, although down from the record $140 billion in 2017.

US tax reforms meant a reduced cut in the US corporate tax rate from 35 percent to 21 percent, and the base erosion and anti-abuse tax (BEAT) had reduced Bermuda's long standing tax advantage over US companies.

Against this backdrop, 2018 featured significant M&A activity, including the purchase of XL Group by AXA, American International Group (AIG) purchasing Validus, and Markel acquiring Nephila.

Fitch suggested M&A activity continues to persist on Bermuda as profit and growth challenges leads to marginalised players selling their business.