Cat bond issuance and reinsurance market competition to increase, says Fitch

Gavin Bradshaw 01/09/2010

Fitch Ratings said today (1 September 2010) that it expects to see intensification of competitive conditions in the reinsurance market and increasing levels of cat bond issuance.

Fitch’s 2010/2011 Reinsurance Review and Outlook predicted that competition in the global reinsurance industry is expected to intensify, leading to pressure on earnings, but said the rating outlook for the industry remains stable.

At the same time, cat bond issuance in the first half of 2010 has indicated a sharp increase compared to last year, with a total issuance for 2010 of $4-6bn expected – comparable to levels experienced in 2006.

"The relative attractiveness of the reinsurance operating environment has resulted in an intensification of competitive conditions and prospects for continued strong earnings have diminished for many global reinsurers," said Chris Waterman, managing director in Fitch Ratings' Insurance group (pictured above).

"Fitch considers that the next12-24 months will prove to be a period of notable differentiation between companies."

At around $320bn, the industry’s strong levels of capitalisation are higher than before the financial crisis, said Waterman.

It is expected that the record levels of catastrophe (cat) activity for the first half of 2010 will affect earnings for reinsurers for the year as whole, with the Chilean earthquake presenting a major event for reinsurers.

Waterman said the implementation of Solvency II is likely to drive demand for reinsurance, which could increase rates, particularly for capital-intensive lines.

Solvency II could also have a positive effect on cat bond issuance, as the regime favours fully-funded vehicles, he said.

Fitch’s 2010/2011 Reinsurance Review and Outlook covers a ‘ratings universe’ of around 70 reinsurance companies, encompassing approximately 90 per cent of the premium volume for the entire sector.

The ratings outlook for the industry was revised to stable from negative in November 2009 following strong levels of capitalisation and earnings within the sector and increased accessibility to capital markets.

Waterman said the predominant rating activity expected for reinsurers was affirmation, with an overall increase in positive ratings and a decrease in negative ratings. However, he added that individual companies’ positive ratings might be affected by overall group ratings.

Commenting on the progress of Hurricane Earl towards the US East Coast, Waterman said it would take at least a $30-40bn loss event to have a material impact on the current reinsurance premium rate environment – around 10 per cent of the underlying capital base supporting the reinsurance industry.

Waterman commented that the expected pickup in consolidation within the reinsurance industry implied by low levels of economic activity hadn’t happened due to a number of reasons.

Chief amongst these was uncertainty around Solvency II implementation and an overall reduction in purchasing power among reinsurers, due to their low share values.

However, said Waterman, although M&A activity was “low on the radar” for the industry, some activity is still possible, most likely in Bermuda.

Tags: Cat bonds, Fitch Ratings, Reinsurance

Captive Live USA

News

Cat bond issuance and reinsurance market competition to increase, says Fitch

Post a comment

Slosorkisee 08/04/2011 10:40am

Data Centre

Company and Ratings Search

Cell Company Guide

Essential Reading for risk managers