Mergers and acquisitions in the reinsurance industry may rise in coming years because of higher valuations and the inflow of alternative capital, according to Fitch Ratings Ltd.

The consolidation would improve companies’ credit profiles as reducing the number of reinsurers and the “associated underwriting capacity” may lift reinsurance prices, or at least limit declines, the London-based ratings firm said in a statement today.

Reinsurers are under pressure to shore up earnings hurt by disaster claims and low interest rates. Reinsurance rates fell in seven of the last 10 years, according to the Guy Carpenter World Property Catastrophe Rate on Line Index, while excess capital further undercuts pricing.

“The reinsurance market has appeared a good candidate for consolidation in recent years due to the level of undeployed capital and the number of small and mid-size companies with limited organic growth options,” Fitch said in the statement. “The increasing availability of alternative reinsurance such as catastrophe bonds could add to these trends by providing further sources of capital to the market while reducing growth opportunities for traditional reinsurers that are in direct competition with the alternative providers.”

The reinsurance industry had capital of $510 billion at the end of June, just short of a record $515 billion three months earlier, according to Aon Benfield, the reinsurance broker of Aon Ltd., which mediates deals for primary insurers.

The growth in broker-led passive underwriting facilities, where a reinsurer agrees with a broker to automatically take on a fixed proportion of all risks, also may fuel deal making by pressuring smaller firms to merge as reinsurance prices come under pressure, Fitch said.

Editors: Steve Bailey, Jon Menon