Fitch Ratings says in a new report that major tier 1 reinsurers stand to benefit most from a changing reinsurance market and mounting competitive pressures while small mono-line companies will be the hardest-hit. Fitch says recent reported financial results confirm that major Tier 1 reinsurers with their strong franchises and market positions are well placed to adapt to and profit from the changing reinsurance landscape. The current macro operating environment is likely to extend beyond a normal soft market cycle, with the continued growth of alternative capital, changes in the purchase and distribution of reinsurance and increased regulatory costs creating significant challenges.

Conversely, small mono-line property catastrophe reinsurers, without other distinguishing attributes, remain most vulnerable to negative rating actions, through any protracted period of market price softening.

Fitch says in its report that the sector outlook for the reinsurance industry is negative, with premium prices expected to fall further in 2016 while investment yields will remain close to historical lows. Soft market conditions will prevail, due to subdued reinsurance demand and fierce competition, especially where alternative capital and traditional reinsurers compete directly.

Nevertheless, the rating outlook for the reinsurance sector is stable. This assumes a base case scenario that over the next 12-18 months a majority of reinsurers will be able to maintain overall adequate profitability and strong capitalisation despite softening prices, and that any decline in earnings will be within the ranges that current ratings can tolerate.

Fitch says it expects to affirm ratings for most reinsurers although a select group of smaller mono-line companies could suffer downgrades or be moved to negative outlooks. Casualty rates are expected to fall further in 2016 as reinsurers look to non-catastrophe lines for profit. Reinsurance M&A activity is expected to continue into 2016, although it is unclear how successful the latest round of tie-ups will prove in delivering increased value.

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