Bermuda reinsurers’ “anaemic returns” make them the most under-pressure group in an under-pressure industry, according to analysts from a global rating agency.
AM Best, maintaining its negative outlook on the global reinsurance sector, said conditions remained ripe for more mergers and acquisitions in the coming years.
Best was one of three rating agencies to report on the global reinsurance sector yesterday — and none of them had a bright outlook for the industry’s profitability.
Bermuda has seen significant consolidation in recent years, with combinations including XL and Catlin, RenaissanceRe and Platinum, as well as Endurance and Montpelier, deals which cost jobs in the industry as operations were streamlined.
“Companies are flush with capital, borrowing is still relatively inexpensive, opportunities for organic growth are limited, and some companies are struggling to cover the cost of capital, which puts M&A on the table,” states Best’s Global Reinsurance Segment Review, entitled Down But Not Out, Reinsurers Look to Reposition Amid Market Disruption.
“We believe the Bermuda market is under the most pressure, given its market’s rather anaemic return on equity of 6.8 per cent for 2016.”
Best said previous deals generally focused on gaining scale or broadening market footprint, but today the trend was leaning towards “finding a home in a larger organisation, can have autonomy and be nimble but have some parental protection”, as seen in the Endurance-Sompo and Allied World-Fairfax deals.
Best points out that the reinsurance market is “far from thriving and appears to be operating amid malaise, given that the current reality seems to have little sway on pricing”.
It added that the industry had booked only its second accident-year underwriting loss in a decade. As a whole, the industry’s return on equity slumped to 8 per cent in 2016 — a fall of five percentage points since 2013.
Reinsurers have seen returns crimped by a combination of low-interest rates weighing on investment returns, increased competition from third-party capital in the form of insurance-linked securities such as catastrophe bonds and a relatively benign period for insured catastrophe losses — a scenario that has kept rates falling.
Analysts at Fitch Ratings see no end in sight for the soft market. Yesterday Fitch said it expected reinsurance rates to decline by as much as 7.5 per cent in the coming year — absent a major catastrophe hit — as ILS capacity continues to expand.
With ferocious Hurricane Irma potentially heading for heavily insured Florida, it is possible that a major loss could occur.
Fitch, which has a negative outlook for the sector, added that losses from Irma, on top of those from hurricane Harvey, could significantly pressure reinsurers’ profitability.
“This could in turn put pressure on ratings, as the continued erosion in profitability in recent years has left little scope for a further deterioration in key metrics at current ratings,” Fitch added.
A third rating agency, Moody’s, took a more optimistic view, yesterday raising its outlook for the global reinsurance sector to stable from negative.
Moody’s conceded that the operating environment remained negative, with the continued double-digit-pace growth of alternative capital limiting the scope for rate increases.
“However, we believe reinsurers are adjusting to these challenges, and that their sustained balance sheet strength and disciplined underwriting will support their current ratings,” Moody’s stated.
Most reinsurers have reduced their exposure to peak zone natural catastrophe risk, Moody’s said, continuing “a downward trend that has been in evidence for several years”.
Hurricane Harvey, which caused torrential rain and devastating flooding in Texas, would likely drive a regional uptick in pricing, without having a material impact on the wider market, Moody’s said.
Yesterday, catastrophe modelling firm AIR Worldwide estimated that insured losses from wind, flood, and storm surge combined are expected to exceed $10 billion with around $3 billion of that resulting from winds and storm surge.
The estimate does not include losses to the government-subsidised National Flood Insurance Programme.
“However, should Hurricane Irma make landfall in Florida, and result in significant insured losses, the close succession of large cat events could have a stabilising effect on US reinsurance prices,” Moody’s added.