While more M&A deals are likely among Bermuda insurers and reinsurers in 2016, they won’t do much to reduce pressures created by a limp and heavily competitive market, Fitch Ratings said in a new report.
Reinsurers in particular will likely experience more suffering through 2016, Fitch said, due to more capital supply and slumping demand, which will continue the downward spiral pressuring both pricing and earnings.
Fitch explained in its Bermuda Market (Re) Insurance Dashboard 2016: “M&A activity is likely to continue in 2016 with conditions ripe for additional transactions as companies face limited organic growth options and desire enhanced scale and diversification. However, increased M&A activity will have a limited impact on abating supply-side competition.”
Clues to this direction stem from 2015 company performances, Fitch said.
Some of the largest individual premium growth increases in Fitch’s group of 13 large publicly traded insurers and reinsurers with a Bermuda presence came from acquisitions in 2015. While net premiums for the group ticked up about 2 percent, the Fitch report pointed out that there was “significant growth” at companies such as XL Group plc and RenaissanceRe Holdings that came largely from their respective acquisitions of Catlin and Platinum Underwriting Holdings.
Fitch said it maintains a stable rating outlook on both global reinsurance and U.S. property/casualty insurance (including coverage of Bermuda market insurers/reinsurers). Fitch said that most ratings should be stable through the next 12-18 months, but warned that certain Bermuda insurers/reinsurers could see negative rating actions if they experience material price adequacy declines.
Some findings from 2015 that help shape Fitch’s market expectations for 2016:
- Bermuda insurers/reinsurers experienced flat growth in aggregate shareholders equity during 2015. The exception came from M&A related growth, such as the XL/Catlin deal and Endurance Specialty Holdings’ purchase of Montpelier Re Holdings Ltd.
- Bermuda insurers/reinsurers generally reported favorable, but declining reserve development, which helped positively shape their combined ratio for 2015 by about 6.1 percent. This, in turn, led to an accident year combined ratio of 94.1.
- Fitch said its group of 13 large publicly traded insurers/reinsurers with Bermuda operations posted an 88 combined ratio for 2015, versus 2014’s 86 combined ratio. While natural catastrophe losses stayed low, man-made catastrophe losses grew, and the underwriting environment got worse.
- Return on equity dropped from 11.1 percent in 2014 to 9.1 percent in 2015, due to unrealized investment losses driven by widening credit spreads.
Here are Fitch’s group of 13 publicly-traded Bermuda insurers and reinsurers, whose 2015 data informed its report: RenaissanceRe, Validus Holdings, Endurance Specialty Holdings, Everest Re, PartnerRe, ACE (which merged with Chubb), Arch Capital Group, White Mountains Insurance Group, Aspen, XL Group, AXIS Capital Holdings, Allied World and Argo.
Source: Fitch Ratings
