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Pricing in the reinsurance market has been pressured by a long-running influx of alternative reinsurance capital from private equity firms, hedge funds and pension plans. However, the flow of alternative capital is slowing slightly, particularly from collateralized reinsurance. Insurance linked securities (ILS) pricing has also stabilized recently, as indicated by the spread between ILS and high-yield bonds compressing to around 100 bps. Fitch believes this means that capital market investors may have a waning appetite for reinsurance risk.
In addition to the challenges of a capital-saturated market, premium declines and some upward pressure on ceding commissions helped to drive negative growth in first-half 2015 profits. Several noncatastrophe marine events, including the Pemex offshore rig explosion, also contributed to deterioration in underwriting results in first-half 2015.
Given the soft market conditions, reinsurer consolidation is likely to continue as companies consider M&A to combat market stress and limited organic growth opportunities. While some consolidation might be a slight credit positive for moderating competitive pressures, Fitch is likely to negatively view deals where achieving greater scale and diversity is the singular purpose of the deal and strategic rationales are unconvincing.
Capital levels remain strong, but deteriorated slightly in first-half 2015, mostly on unrealized investment losses due to rising interest rates on fixed-income portfolios. Reinsurers continue to return current operating earnings to shareholders through share repurchases and special dividends, albeit at a much slower pace than in 2014. Capital also declined in part due to the pursuit of M&A transactions.
Global reinsurers' mid-year 2015 financial results (Fitch Ratings subscription required)