Moody’s Investors Service remains negative on the prospects for the global reinsurance industry, in its latest updated outlook today, explaining that with capacity levels still high and demand shrinking, there is an expectation that further price declines are ahead.
“Reinsurers face a predicament as capacity remains abundant while demand from primary insurers is decreasing. Demand has dropped because of the rationalization of reinsurance purchases and low global economic growth,” commented Brandan Holmes, senior credit officer and author of Moody’s latest reinsurance sector report.
As a result of the continued pressure Moody’s expects further reinsurance price declines in the single-digit range at the next major renewal season in January.
With reinsurers heading to Monte Carlo this weekend to meet with clients and partners and discuss the prospects for renewals, all of the major rating agencies have now delivered a negative outlook for the sector, with an expectation that pricing pressure will continue.
Moody’s sees reinsurance heading into “uncharted underwriting and strategic territory” as companies seek to remain relevant with clients and find new ways to attract profits, in a market where margins have thinned almost to the point of technical profitability no longer being met.
The “challenging environment” is exacerbated by excess capacity, including the continued growth of alternative capital and the increasing adoption of ILS techniques and capital markets capacity.
Reinsurers are also shifting their business into new lines and regions, again in search of something to prop up their returns on equity, but this comes with its own risks.
“The focus on different underwriting and strategic areas could mitigate some pressure on traditional lines, and reinforce reinsurers’ relevance in alternative capital, although the risks entailed in a large-scale move into new areas should not be underestimated,” Holmes commented.
Moody’s foresees “increased risks for reinsurers as they venture into uncharted underwriting and strategic territories in an effort to retain relevance and profitability,” Holmes wrote in the report.
With earnings prospects declining, pricing pressure set to continue, capital being returned to shareholders rather than invested in new initiatives and innovation, the longer-term prospects are looking mixed for all but the very largest of reinsurance players, it seems.
Even the wave of M&A isn’t helping. Holmes explained; “A wave of mergers and acquisitions activity over the past 18 months is unlikely to remove significant excess capacity from the industry.”
So with every outlook in the pre-Monte Carlo Rendez-vous run-up maintaining a negative view and highlighting additional risks as reinsurers react to the disruption and jostle for position in the market, the gloom over traditional reinsurance remains.
The next few months will remain testing and the full-year results for 2015 may not live up to expectations, on a normalised basis, unless reinsurers can find some way to prop up pricing more broadly than just in Florida property cat where the floor has first emerged.
The opportunity remains for players with a lower-cost of capital to take advantage and continue to make headway into the reinsurance market. How traditional players react, whether disciplined or otherwise, may be telling for the prospects of some firms over the next twelve months.