An uncertain future for Bermudian re/insurers: Fitch

The host of market pressures in the global insurance and reinsurance market, exacerbated by market consolidation, ample capacity and impending Solvency II requirements, presents a challenging and uncertain future for Bermudian entities, according to Fitch Ratings.

Global investment ratings agency, Fitch Ratings, has released a report examining the current trends and outlook for insurers and reinsurers in the Bermudian market, signalling that while profitability is currently strong, the future is far less certain.

“The ratings outlook is stable for reinsurers, but the reinsurance sector outlook remains negative,” advised Fitch, emphasising; “Capital expansion and the arrival of new alternative market participants are fostering price competition, limited growth opportunities and future earnings pressure that in turn are promoting market consolidation.”

In fact, Fitch noted earlier this year that it predicts further deterioration of profitability for Bermuda reinsurers, citing continued market pressures, and as the influx of capacity and benign loss period persists, it’s unsurprising that Fitch maintains a cautious outlook on the sector.

One area that could seriously dent Bermuda’s hierarchy as an attractive domicile for reinsurance and ILS, is the impending Solvency II requirements due to come into effect January 1^st, 2016. While Fitch expects Bermuda to achieve full Solvency II equivalency prior to this, it stresses that “any failure to attain equivalency by this deadline may negatively affect re/insurers’ ability to compete within the European Union.”

Furthermore, the ongoing merger and acquisition (M&A) trend that’s sweeping the global insurance and reinsurance landscape is also likely to impact the Bermuda markets.

A search for diversification and scale to offset the negative re/insurance environment has driven much of the M&A in the sector, as catastrophe reinsurance lines, and increasingly primary lines continue to experience rate decreases, more consolidation is expected throughout 2015.

Fitch echoed this point; “Increased merger and acquisition (M&A) activity within the global reinsurance sector has particularly affected Bermuda (re)insurers and shows no signs of slowing. Of note is the recently announced merger between ACE Ltd. and Chubb Corp., both of which own Bermuda-based entities, expected to close in first-quarter 2016.”

However, in spite of this and perhaps offsetting some of the negative noise surrounding the global reinsurance market, and the local Bermudian sector, Bermuda continues to be an attractive place for ILS and hedge funds to enter, with registrations in 2015 being dominated by such entities.

This highlights just how important a role collateralized reinsurance structures and ILS are playing in the international reinsurance market, and more locally the Bermuda financial services landscape.

“Below-average catastrophe losses over the past three years have been beneficial to underwriting results, with the group reporting a three-year average combined ratio of 84.48% and a five-year low 82.2% combined ratio in 2014,” said Fitch.

But while the group of class 4 insurers and reinsurers domiciled on Bermudian shores continue to report solid financials, particularly with property/casualty lines, the predictions for further rate reductions across almost lines of business, driven by ample capacity and competition, indicates that profitability will likely be pressured further down the line.

Also, explains Fitch; “The magnitude of favourable reserve development is also expected to decline in the near to mid-term as slower revenue growth will struggle to keep pace with generally stable loss cost trends.”

Only time will tell just how far the M&A trend will go, but so long as rates remain pressured across a swathe of reinsurance business, and increasingly primary lines too, all the signs point to a continuation of the trend.

The abundance of capital in the space impacting the Bermuda markets and the wider insurance and reinsurance landscape is likely to intensify and remain also, even after a large loss event, so absent its deployment into innovative risk transfer structures and solutions around the globe, included the developing, uninsured regions, pressures on rates are expected to persist and increase throughout 2015.

It’s also worth adding here that as well as still being attractive to investors, insurers, reinsurers and ILS players; Bermuda is still the leader in capturing the issuance of catastrophe bonds.

With recent reports claiming that the island captured 87% of new catastrophe bonds and ILS that was issued in 2014, presenting an opportunity for those seeking to deploy capital away from the highly competitive and pressured traditional reinsurance business lines.