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The reinsurance sector got mixed reviews from ratings agencies Standard & Poor’s Global Ratings, A.M. Best Co. and Moody’s Inc., according to their respective reports issued Tuesday.
Moody’s maintained a stable outlook for the sector, based on “reinsurers' strong balance sheets” and “restructuring over the past several years … which has largely improved the overall credit profiles of reinsurers,” according to its Outlook, Reinsurance Global.
Standard & Poor’s also said it is maintaining its stable outlook on the global reinsurance sector and most of the reinsurers it rates, “mostly because of reinsurers' still-robust capital adequacy and because underwriting has remained relatively disciplined.”
A.M. Best, in contrast, cited continuing ample capacity and said it was “maintaining our negative outlook for the segment, as we expect overall market conditions to remain very competitive given the demonstrated available capital after these events,” referring to the substantial industry insured losses related to the 2017 U.S. hurricane season.”
S&P also noted the capacity and competitive challenges. “The sector is facing weak business conditions, as the influx of alternative capital continues to challenge reinsurers' business models,” S&P said in its report, The Top Global Reinsurers Are Breaking Away From The Pack.
Moody’s suggested the modest rate and price increases achieved at Jan. 1 renewals waned when players came back to the table mid-year.
“Relatively weak pricing during the 2018 mid-year policy renewal period suggests that favorable pricing trends at the start of the year are losing momentum ahead of the key January 2019 renewals as excess capacity weighs on pricing,” Moody’s said.
S&P said the abundant capital is weighing on reinsurers’ competitive positions.
“Operating conditions for global reinsurance remain difficult despite modest 2018 renewal rate increases. We think reinsurers' profitability is likely to barely exceed their cost of capital in 2018 and 2019,” S&P said. “The tide of cheaper alternative capital continues to compete with traditional players, who typically have a higher cost of capital.”
Moody’s, however, asserted that reinsurers are also deploying alternative capital to their advantage.
“Reinsurers are using alternative capital to enhance their competitive position and to lower their total cost of capital, manage peak risk exposures and improve risk-adjusted returns,” Moody’s said. “For reinsurers with strong risk modeling capabilities and marketable underwriting skills, managing alternative capital vehicles will provide a distinct competitive advantage in the years ahead.”
Best said reinsurers can utilize alternative capital as one strategy in lieu of pursuing or engaging in a merger or acquisition.
“For (re)insurers not looking to enter into a merger or acquisition deal, building a fee income stream by working with third-party capital is another logical approach to addressing this evolution of the global reinsurance sector,” Best said.
Mergers and acquisitions will nonetheless continue, according to Moody’s.
“M&A continues as reinsurers push to increase scale and diversification,” Moody’s said. “Firms continue to engage in M&A to scale up, diversify, and improve profitability through capital efficiencies and cost reduction. Smaller reinsurers are under the greatest pressure to find a merger partner.”
“The industry has seen some significant shifts due to M&A, a trend we expect will continue,” Best said.
Property catastrophe reinsurance rates fell by up to 7.5% during midyear renewals for accounts that did not report losses, Willis Re said in its reinsurance pricing report on Monday.