The reinsurance market showed signs of decelerating rate declines in its most recent June/July 2015 renewals, indicating that pricing could be approaching a new equilibrium, says Fitch Ratings in a new global sector report.
Reinsurance pricing has experienced downward pressures as a result of the influx of alternative reinsurance capital from private equity firms, hedge funds and pension plans, said Fitch in the report titled “Global Reinsurers’ Mid-Year 2015 Financial Results, Underwriting Results Profitable, but Pressured, Pushing M&A Surge.”
The ratings agency noted, however, that the flow of alternative capital is slowing slightly, particularly collateralized reinsurance. Insurance linked securities (ILS) pricing has also stabilized recently, Fitch said, which is demonstrated by the spread between ILS and high-yield bonds compressing to around 100 basis points.
Fitch believes this means that capital market investors may have a waning appetite for reinsurance risk.
The challenges of a capital-saturated market, premium declines and some upward pressure on ceding commissions helped to drive negative growth in first-half 2015 profits, Fitch confirmed. Several non-catastrophe marine events, such as the Pemex offshore rig explosion, also contributed to deterioration in underwriting results in first half of 2015.
“Given the soft market conditions, reinsurer consolidation is likely to continue as companies consider M&A to combat market stress and limited organic growth opportunities,” the report said.
While some consolidation might be a slight credit positive for moderating competitive pressures, Fitch said it is likely to negatively view deals where “achieving greater scale and diversity is the singular purpose of the deal and strategic rationales are unconvincing.”
A total of six acquirers, including RenaissanceRe, XL, Fairfax, Endurance, China Minsheng Investment and EXOR, either have closed, or soon will close, deals, Fitch said.
On a positive note, catastrophe losses during the first six months were below average and prior-accident-year reserve developments were generally favorable. Demand from the Florida catastrophe market, both from Florida-only primary providers and the Florida Catastrophe Fund, help support demand levels. This factor drove the deceleration on rate declines in Fitch’s view. Still, reinsurance net premiums written (NPW) declined 8.5 percent in first half, compared to the same period in 2014, Fitch said, adding that NPW actually rose 0.7 percent, if adjusted for foreign currency translations.
Capital levels remain strong, but deteriorated slightly in first-half 2015, mostly on unrealized investment losses due to rising interest rates on fixed-income portfolios, the report went on to say.
It noted that reinsurers continue to return current operating earnings to shareholders through share repurchases and special dividends, albeit at a much slower pace than in 2014. Capital also declined in part due to the pursuit of M&A transactions.
Source: Fitch Ratings
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