The continued price reductions faced by the traditional reinsurance industry, with the January 1st 2015 being the third consecutive renewals where price declines have been experienced, are credit negative for reinsurers according to Moody’s Investors Service.
With prices continually falling across much of the reinsurance industry now, Moody’s is reiterating its negative outlook on the space as the situation is putting increasing pressure on reinsurers underwriting margins at a time when investment returns are expected to remain at historic lows.
Moody’s refers to reinsurance brokers renewal reports, which are in total agreement when they say that rates are largely down across the board. How much they are down depends on who you ask, as well as how they measure it, but it’s clear that the January reinsurance renewals provided no real solace for traditional players and as a result the pressure and negative outlook persists and has likely worsened.
Moody’s says that the reported premium declines are in line with its expectations, as excess traditional and growing alternative capital continue to seek opportunities to be put to work, catastrophes remain light and demand low, which can only result in further softening.
With other issues such as tiering meaning that some reinsurers are being marginalised, it is becoming hard for some reinsurers to compete.
Moody’s expects revenue reductions at reinsurance companies to be most pronounced at smaller reinsurers and monoline players. However, it’s worth noting that some of the brokers are beginning to suggest that even the larger reinsurers, aside from the big five or so players, are also increasingly at risk as market conditions continue without change.
Moody’s notes that the more capital efficient reinsurers will be the ones that everyone is trying to compete with. That likely applies to ILS players as well, that their capital efficiencies could see much larger traditional reinsurance firms having to compete with them.
The “meaningful erosion of the underwriting profit margin” as a result of the continued price declines in reinsurance is credit negative, Moody’s says. Supply and demand are set to remain unbalanced, which Moody’s believes will cause industry returns to fall near to or below its cost of capital in 2015.
Moody’s believes that the reinsurance market is now undergoing a reshaping, as it seeks ways to adapt to and shield itself from these challenging market conditions. As a result some are expected to scale back their reinsurance portfolios, while others are expected to go for growth and scale, ramping up and looking to M&A.
Moody’s expects the trend seen at the January reinsurance renewal will persist throughout the year to affect renewals in April, June and July. As a result the negative view on the reinsurance sector will persist along with it. Remember, Moody’s said in December that while rates were down, the margins left in reinsurance meant that they do not consider it a truly soft market yet, so there is further room for rates to fall and margins to be squeezed even more.
As reinsurance rates approach a level where they may no longer meet every underwriters cost of capital M&A is likely to ramp up, we will see more markets pulling back from writing reinsurance and we may see even greater penetration of ILS and alternative capital as a result. As a result we’re unlikely to see any change in the rating agencies views on the sector for some time to come and as 2015 progresses we may see the negative view moving onto specific sectors of reinsurance or even identifying particular companies that are at risk of ratings downgrades.