25 August 2015 Insurance

Reinsurance pricing could reach a new equilibrium: Fitch

Pricing in the reinsurance market could be approaching a new equilibrium, according to rating agency Fitch.

The rating agency cited decelerating rate declines in the most recent June/July 2015 renewals as potential evidence of the advancement towards an equilibrium.

In its latest report, Global Reinsurers' Mid-Year 2015 Financial Results, Underwriting Results Profitable, but Pressured, Pushing M&A Surge, the rating agency explained that pricing has been pressured by a long-running influx of alternative reinsurance capital from private equity firms, hedge funds and pension plans.

“However, 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.”

The challenges of a capital-saturated market as well as premium declines and some upward pressure on ceding commissions have all contributed to negative growth in first-half 2015 profits, according to the rating agency.

“Several noncatastrophe marine events, including the Pemex offshore rig explosion, also contributed to deterioration in underwriting results in first-half 2015,” it added.

Fitch also believes that 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.”

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