Only a huge unmodelled catastrophe or a series of such model misses can halt alternative capital, Moody’s warned

Consolidation, strong balance sheets and continued excess capacity among reinsurers have kept Moody’s outlook stable on the reinsurance sector for the second consecutive year.

Pricing pressure is likely to resume in 2019, Moody’s warned, noting that alternative reinsurance capacity had reached an estimated $95bn by the first quarter of 2018, taking catastrophe bonds, sidecars, collateralised reinsurance and industry loss warranty business.

The ratings firm held a media briefing in London on the health of the global reinsurance sector on the eve of the industry’s annual meeting in Monte Carlo.

“You may argue why we have a stable outlook. Some of the trends are negative but we think the sector has the capacity to stay strong,” said Antonello Aquino, associate managing director at Moody’s. “One main reason is the balance sheet: despite heavy claims and losses last year the capital in the sector continues to grow.”

He noted that last year when it altered Aspen’s company outlook to negative, this was mainly down to the performance of its US primary business, rather than underwriting performance on the reinsurance side. 

“What was interesting about the recent Aspen announcement [its $2.6bn takeover by Apollo] is that we’re seeing private equity money joining the space. So there is interest from outside,” said Aquino.

“Obviously Apollo has a history of insurance, and has done a few acquisitions before, but the fact that outsiders are interested in this market shows that there is willingness to invest in this market despite negative trends in terms of pricing,” he continued.

Consolidation among reinsurers has strengthened the outlook of the top tier firms in particular, Aquino suggested, while reduced pricing had added impetus to cost saving drives in the sector. Many reinsurers, particularly some smaller firms, had been keen to take advantages of slight price rises after 2017’s cat events to grow their top line in recent months.

“People are still holding on for new opportunities. Scale is important, because it enables you to partner with your customers to provide coverage across the breadth of their portfolio,” said Brandan Holmes, senior credit officer at Moody’s.

“People are still waiting for some sort of price hardening, or growth in new product areas, such as flood and earthquake reinsurance, to fill the protection gap. People are waiting for opportunities and wanting to remain well-capitalised, well-positioned, stable and strong partners,” Holmes added.

Smaller reinsurers are under continued mergers and acquisitions (M&A) pressure, Aquino suggested, to continue to compete against bigger rivals. “It’s clear that if you are in the $3.5bn capital range, you are seen as a potential target,” he warned.

Previous waves of mergers have contributed to the sector’s present stability, according to Holmes. “If the M&A didn’t happen over the past few years, our outlook might have been different, because we might have had a lot of smaller players in the portfolio still,” he said.

“If you think of companies like Montpellier and Platinum Re, a lot of smaller guys got bought up, so the population consists of bigger and stronger firms,” Holmes continued.

There is ongoing uncertainty for reinsurers in the “mid-tier” and below, he cautioned, as they continue to be seen as potential acquisitions, facing a tough market environment. “That’s an interesting space to watch,” Holmes added.

While some in the market continue to hope for a turn in pricing, the view at Moody’s is that this would take a major model-busting cat event. Alternative capital is unlikely to move out of the sector just because interest rates rise, as there is too much waiting on the sidelines, and the sector provides a welcome uncorrelated diversifier from capital markets’ risk.

“The interest rate rise in the margin. Some players might move their money but it’s very much on the margin. Funds have been able to reload and in some cases raise more capital than they had to start with, more than enough to replenish losses,” said Sarah Hibler, associate managing director at Moody’s. 

“What could change their minds? There were a lot of cats last year, but they were relatively well modelled. I think what may shift perceptions is if there’s a catastrophe or series of catastrophes in the future that are outside of modelled results. That’s one of the things that might cause alternative capital to pause.”