Reinsurance rates to continue declines at mid-year: Morgan Stanley

Analysts at Morgan Stanley have predicted further, albeit slower, reinsurance rate declines at mid-year as market headwinds persist. However, the firm does highlight an opportunity for insurers and reinsurers created by the flurry of merger and acquisition (M&A) activity witnessed in 2015.

The global reinsurance industry remains under significant pressure, and despite 2015 benefiting from a continuation of benign cat losses and reserve releases, Morgan Stanley highlights that market pressures will persist and earnings will likely continue to diminish.

Pricing in the global reinsurance market continued to fall at the key January renewals, and analysts expect more of the same at mid-year. Declines are expected to be at a slower rate than at last year’s June and July renewal though, with market sources suggesting an expectation of single digit declines across the market, with differences by line and region.

Our sources suggest that casualty and specialty lines of reinsurance will be the areas to look to for the steepest rate declines at the mid-year 2016 renewals, with property and catastrophe lines likely to see a little less pressure, as markets seek to hold up rates which they feel are already approaching technical levels.

True, organic growth has been difficult to achieve in recent times and it’s been noted by numerous market participants, Artemis included, that reserve releasing for some companies has perhaps been masking true profitability.

With market analysts also highlighting that with the benign loss environment reserves are expected to become thinner, and lower releases could result in diminished earnings moving forward.

However, it’s not all doom and gloom for insurers and reinsurers operating in the space, according to Morgan Stanley.

The softening trend witnessed throughout 2015 resulted in a wave of M&A activity, as companies looked for scale and yield, while a desire to remain relevant in a rapidly changing industry also drove consolidation.

But the recent market disruption seen across the sector creates opportunities explains Morgan Stanley, as for certain carriers it “provides opportunity in both insurance and reinsurance, although market participants are cautious on underwriting returns.”

The firm highlights that the wave of M&A activity among insurers and reinsurers results in larger companies “striving to maintain business while others find opportunities to acquire talent and businesses.”

Undoubtedly, at times of widespread industry consolidation there will be some winners and losers, and with market pressures persisting Morgan Stanley expects further M&A activity during 2016, albeit at a slower rate than witnessed last year.

Analysts note that for the re/insurers that still have a need to improve and secure their market relevance, along with a desire to increase scale and manage rising expenses, further M&A activity is likely in the coming months.

With the firm touting the smaller reinsurers, or more specialist insurers as potential targets, adding that Asian market players might also seek for further offshore diversification, and therefore look to merge with or acquire a foreign entity.

It will be interesting to see how much further the M&A trend goes, and whether the large value of deals witnessed last year will continue, or will the market instead see smaller players eaten up by the more sizeable re/insurers as a means of staying in the game.

For the smaller, more niche reinsurance companies it is still possible to have a meaningful influence on the market without embarking on any consolidation, there remains a lot to be said for being specialists and experts in a particular underwriting field. Although this does clearly become more challenging in a softening, competitive environment.

As with any flurry of M&A there will undoubtedly be further redundancies, but as highlighted by Morgan Stanley the positive from this is that a wealth of industry talent could become available, and those that capitalise on opportunities during a testing market position themselves better for when the market does eventually start to turn.

The biggest fear at the upcoming renewals will be of capital seeking to gain rate by moving into areas of the market which are perceived to be better priced, on a risk adjusted basis. This could see significant competition in areas such as the specialty lines and casualty, particularly as the traditional players look to avoid softened catastrophe risks and retrocession.

If a significant amount of capacity diverts itself towards these areas of the market the rate declines could be steeper than expected, we’d imagine. For the ILS fund managers and other collateralised reinsurance vehicles, the key at the mid-year renewals will be to maintain discipline and walk away from underpriced U.S. property catastrophe programs, even if that means having to return some capital to investors.

Better to live to underwrite another day, than to load up on U.S. coastal risk at poor pricing levels just in advance of the 2016 hurricane season.