Bermudian re/insurance M&A to continue as profits wane: Fitch

A continuation of insurance and reinsurance market pressures are expected to further diminish the underwriting profitability of Bermudian re/insurers during 2016, and with organic growth hard to come by Fitch Ratings predicts a surge in merger and acquisition (M&A) activity on the island.

Increased capital supply from both traditional and alternative sources combined with “sluggish” demand will continue to lower pricing and pressure earnings for Bermuda insurers and reinsurers moving into 2016, says Fitch.

The ratings agency notes if “pricing adequacy declines materially” some Bermudian firms could face negative rating actions, underlining the fact that rates in some business lines are falling below the cost-of-capital for some.

Owing to the supply/demand imbalance underlined by an oversupply of capital focused on the most competitive property cat business lines, a trend expected to continue and result in further pricing pressures and diminished earnings, “Fitch’s global reinsurance sector fundamental outlook is negative.”

Aggregate shareholder equity remained flat during 2015, but the 13 re/insurers in Fitch’s group did report a higher combined ratio of 88%, compared with 86% the previous year.

A lack of losses continues to stress the sector and as the trend persisted throughout 2015 underwriting profits diminished. Despite Bermudian companies reporting favorable reserve releases, in a benign cat environment reserve developments can only boost profits for so long, a decline noted by Fitch.

During last year the only Bermudian re/insurers within Fitch’s group that reported sizeable growth in shareholder equity were those that partook in M&A activity. Including Endurance’s acquisition of Montpelier Re, and the XL Catlin merger.

And Fitch expects more consolidation in the coming months for Bermudian insurers and reinsurers as the search for scale, diversification, and relevance intensifies.

“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,” says Fitch.

Continuing to stress that a rise in M&A is unlikely to significantly shift the oversupply trend engrossing the sector.

Notably, Fitch highlights that the groups return on equity for the full-year 2015 declined also, falling to 9.1% from 11.1% in 2014, “as widening credit spreads drove (un)realised investment losses.”

Absent a significant, perhaps unprecedented catastrophe event it’s hard to see any turn in the softening reinsurance landscape in the near future, a notion supported by Fitch and numerous other industry experts and analysts in light of continued market softening.

Re/insurers can only go so far before rates become unacceptable and fail to produce desired returns, something that was evident at 1/1 with a host of firms noting a pullback from writing the most pressured lines and a desire to deploy capital elsewhere.

As a result it’s not surprising to hear Fitch predict that the consolidation surge will remain in 2016, with companies looking at opportunities to merge or acquire in an effort to stay relevant and efficient in a challenging market landscape.

It will be interesting to see which Bermudian firms are subject to bids, and which seek to acquire for themselves in the coming months, with insurers, reinsurers, and increasingly insurance-linked securities (ILS) players all fighting for greater market share.