19 October 2015 Insurance

Tier 1 reinsurers only winners as price floor yet to be reached

The bigger so-called tier 1 reinsurers will be the winners in what is a rapidly changing reinsurance landscape, Martyn Street, senior director in insurance at Fitch Ratings, told Baden-Baden Today. But he also stressed that consolidation was far from a silver bullet for companies seeking greater scale.

“We continue to view major tier 1 reinsurers as the winners in the changing reinsurance landscape and we upgraded three of the four major European reinsurers earlier this year,” Street said.

“Conversely, small mono-line property-catastrophe reinsurers, without other distinguishing attributes, remain most vulnerable to negative rating actions, through any protracted period of market price softening.”

Street added that Fitch has warned that mergers & acquisitions (M&A) also pose many risks. “Concerning M&A, we have been very clear in voicing our concerns that further reinsurance deals face an increasing risk of failing to generate long-term value, particularly if market conditions remain weak into 2016,” he said.

For all its potential pitfalls, however, he expects more consolidation. “M&A is a developing trend among small and mid-sized specialist reinsurers and we anticipate further deals next year, as players seek to increase their size and scale in a consolidating market,” he said.

Both pricing and M&A are likely to feature prominently in many discussions this week, Street said. He said that via discussions in Baden-Baden, Fitch will be looking to understand in more detail what ground has been conceded by reinsurers with regard to broadening terms and conditions, in exchange for smaller price reductions.

“Weakening terms and conditions are less visible to external observers but can be just as detrimental to financial strength in the medium term,” he said.

He added that at a macro level, soft premium pricing conditions and low investment returns will continue to exert earnings pressure for all reinsurers, and the rating agency expects this to continue through 2016.

On this basis, specifically in relation to the upcoming January 1, 2016 renewals, Fitch’s pricing view appears to be more bearish than the industry consensus.

“We expect to see further single-digit price falls across many sub-classes at the January 1 renewals, in contrast to reinsurers’ hopes that the overall outcome will be that prices stabilise,” Street said.

“At the June and July 2015 renewals, reinsurers appeared to take comfort from the slowing to single-digit levels for price reductions across bellwether lines including Florida wind and US nationwide.

“We remain unconvinced that a price floor in the market has yet been reached, noting that  supply-side competition is expected to remain fierce.”

For all the challenges, and despite sector fundamentals being negative, Fitch’s rating outlook remains ‘stable’, with ratings being supported by strong capitalisation and the expectation that any declines in earnings will be within the ranges that current ratings can tolerate, Street said.

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