Bermuda’s reinsurers will welcome the findings of a recent report by Fitch that suggests rates may be flattening out after several years of declines, in part driven by a waning of the level of alternative capital entering the market.
The rating agency said that decelerating rate declines seen in the most recent June/July 2015 reinsurance market renewals could indicate a move towards a new pricing equilibrium in the sector.
In the report, called Global Reinsurers' Mid-Year 2015 Financial Results, Underwriting Results Profitable, but Pressured, Pushing M&A Surge, the rating agency explained pricing has been pressured by a long-running influx of alternative reinsurance capital from private equity firms, hedge funds and pension plans.
“The flow of alternative capital is slowing slightly, particularly from collateralised reinsurance,” said Fitch.
“Insurance linked securities (ILS) pricing has also stabilised recently, as indicated by the spread between ILS and high-yield bonds compressing to around 100 bps. Fitch believes this means that capital market investors may have a waning appetite for reinsurance risk.”
Fitch also said negative growth in the firm half of 2015 has been affected by the challenges of a capital-saturated market, along with premium declines and some upward pressure on ceding commissions.
“Several non-catastrophe marine events, including the Pemex offshore rig explosion, also contributed to deterioration in underwriting results in first-half 2015,” it added.
Fitch believes reinsurer consolidation is likely to continue as companies consider mergers and acquisitions (M&A) to combat market stress and limited organic growth opportunities.
The rating agency said: “While some consolidation might be a slight credit positive for moderating competitive pressures, Fitch is likely to negatively view deals where achieving greater scale and diversity is the singular purpose of the deal and strategic rationales are unconvincing.”
Fitch Ratings, London, Europe