Fitch: 4 Hot Topics Affecting Reinsurance

Fitch published a list of key takeaways from last month’s reinsurance Rendez-Vous in Monte Carlo, where some of the major trends affecting the industry were discussed: mergers and acquisitions, alternative capital, pricing and the Tianjin Port explosion in China.

Meetings with industry professionals during the Rendez-Vous revealed the hottest of all the topics:

Mergers & Acquisitions. The consensus view at the Rendez-Vous which Fitch said it shares, was that the sector’s current run of M&As will continue. “Asian investors in particular appear to be taking a longer-term view by seeking to buy positions in new territories and re/insurance lines, perhaps justifying higher valuation multiples than where the rationale is to consolidate targets through synergistic acquisitions,” Fitch said. The agency cautioned that future reinsurance deals risk “failing to generate long-term value, particularly if market conditions remain weak.”

Pricing. Many reinsurers are optimistic that the slowing pace of premium rate reductions during the June and July renewals is signaling a price floor. However, Fitch is unconvinced that the floor “will be reached during 2016 as a number of fundamental factors that influence pricing remain negative.” Subdued reinsurance demand and strong capitalization “will see fierce supply-side competition persist,” because some reinsurers will defend market share “by writing business below the technical price floor,” Fitch continued.

Alternative Capital. Fitch said the growing presence of alternative capital is, on balance, a negative for traditional reinsurers’ credit quality and financial strength in the current competitive market environment. “While there are some positives for individual companies, the added competition and increased supply of capacity from the capital markets have served to meaningfully dampen reinsurance pricing and resulted in a deteriorating profitability profile for the reinsurance sector,” Fitch continued.

Attendees at the Rendez-Vous widely accepted that a “meaningful proportion of alternative capital is likely to remain in the aftermath of a major loss event or should interest rates return to higher levels.”

Tianjin Re/insurance Losses. Estimates for the insured loss from the explosion at the Port of Tianjin currently range from $1.0 billion to $3.3 billion. Fitch said the loss is very complex, “with the international nature of business activity carried out at the port making it likely that European and US/Bermudan reinsurers will face sizable liabilities from the event.”