Fitch: more insurance mergers likely
Fitch expects more mergers and takeovers to come in the Bermuda reinsurance market amid tough market conditions.
However, the credit rating agency sees the equivalency with Solvency II, the new European Union insurance regulations, as boosting the Island’s competitiveness.
“Organic growth options are limited and scale and diversification are driving a rapid pace of mergers and acquisitions (M&A) activity for Bermuda insurers and Fitch expects industry consolidation to continue,” Brian Schneider, senior director, Fitch, said.
However, Fitch expects the consolidation to progress at “a slightly slower pace than 2015”.
Bermuda has seen major deals that have combined RenaissanceRe with Platinum Underwriters, XL Group with Catlin and Endurance with Montpelier Re. All of those deals caused jobs to be lost in Bermuda.
However, deals that resulted in Ironshore being bought by Chinese investment firm Fosun and PartnerRe acquired by Italian investment company Exor have not apparently resulted in job losses.
Fitch spelled out the pressures causing businesses to consider merging.
In its report entitled Bermuda 2016 Market Update, Fitch said “fragile conditions in the global re/insurance market characterised by falling prices and weakening terms and conditions are pressuring earnings for Bermuda re/insurers”.
Fitch maintains a stable rating outlook on both US property and casualty insurance and global reinsurance, which includes Fitch’s coverage of Bermuda market re/insurers.
However, Fitch’s reinsurance sector outlook is negative as premium prices are expected to fall further in 2016 while investment yields will remain close to historic lows.
The US property and casualty insurance sector outlook is stable as a shift towards sharply inadequate premium rates or profit levels approaching operating losses is not anticipated.
“Despite global market challenges, the Bermuda insurance landscape remains strong in Fitch’s view as the Island adapts to changing market conditions,” Fitch added.
“Bermuda’s favourable tax status and strengthening regulatory framework allow it to compete on the global re/insurance playing field. Importantly, the European Commission awarded Bermuda full equivalency with Solvency II, which was formally implemented on January 1, 2016, enhancing Bermuda’s global competitiveness.”
Fitch also expected the see growth in the hedge fund-backed reinsurance sector this year.
“Hedge fund-backed reinsurers face increased offshore tax scrutiny as well as investment and underwriting challenges which has led several firms to exit the business,” the report stated. “However, Fitch does expect to see captive reinsurers and hedge funds partner in the market.”