Merger-mania may be accelerating among property/casualty reinsurers. But as Fitch Ratings sees it, the Bermuda market in 2015 is adapting in the face of heavy competition, alternate sources of capital and a deteriorating market environment.
Some of that comes to luck, however, thanks to relatively benign weather.
“The combined ratio for the group of 15 publicly traded reinsurers that Fitch Ratings actively follows will remain near the 86.4 posted through the first nine months of 2014, driven largely by continued low catastrophe losses,” Fitch said.
Fitch Ratings sees plenty of positives. Mergers and acquisitions may be increasing, but Fitch said the trend could be a “slight credit positive” for reinsurance that helps reduce the number of players, which “may moderate competitive pressure.”
Fitch said that many Bermuda companies are also smartly diversifying, shifting more capacity into “various specialty reinsurance, primary insurance and Lloyd’s of London businesses” to strengthen themselves in the face of sluggish demand, plus weakening terms and conditions. What’s more, Fitch said that Bermuda-based reinsurers are generally less affected by risks that have landed in Bermuda itself, including “economic contraction and increased government debt.”
On the other hand, Fitch pointed out that intense competition and limited demand leaves few opportunities to generate additional business, so Bermuda reinsurers are likely to continue share repurchases. Also, crucially, alternative forms of capital appear to be permanent, a reality that isn’t ideal for reinsurer, Fitch said.
“Alternative forms of risk transfer are here to stay as a structural change to the reinsurance sector, principally in property catastrophe risk, with most Bermuda reinsurers providing and/or using alternative forms of risk transfer,” Fitch said. “Bermuda reinsurers have a greater potential threat from this added competition, particularly stand-alone traditional property casualty reinsurers that have a less diversified source of earnings and compete more directly with the alternative reinsurance market.”
Source: Fitch Ratings