OREANDA-NEWS. Fitch Ratings says in a new report that future underwriting profitability and reinsurance pricing face increased sensitivity, due to the 2015 normalised underwriting results for the four major European reinsurers being close to breakeven.

Fitch questions whether headline combined ratios provide the most informative and predictive indicator of underwriting vitality when assessing the strength of financial performance and earnings. Property & casualty reinsurance combined ratios reported for FY15 indicate strong underwriting performances and technical profitability. This is in contrast with the challenging operating environment where reinsurance prices are now falling for a fourth consecutive year.

Fitch notes that the gap between the reported and the normalised combined ratio widened notably for the four major European reinsurers in 2015. The average normalised combined ratio was 98.5%, just below breakeven, versus an average reported value of 90.3%. In our view, this increases the sensitivity of future underwriting profitability, and reinsurance pricing, to even a modest rise in major loss claims.

For each reinsurer, either major loss costs or prior-year reserve development, or both, benefited (i.e. reduced) the reported combined ratio. We view this as highlighting a wider deterioration in market conditions, driven by lower reinsurance prices feeding through to results.

The January 2016 reinsurance renewal confirmed that a price floor has yet to be reached. However, the pace of price reductions slowed and portfolio rate reductions for the major European reinsurers were kept to low single digits. Against our expectations, terms and conditions remained stable.

January 2016 portfolio level rate reductions were marginally lower for three of the four major European reinsurers (the exception was SCOR), with all reporting low single-digit decreases for renewed business.

We expect further M&A activity across the sector in 2016 as market conditions limit organic growth opportunities. We do not rule out one or more of the major European reinsurers striking deals but large transformational ones are unlikely. The number of deals may not match recent levels, given the reduced number of Bermudian and London market companies looking to consolidate. It is unclear whether stock market turbulence and political developments will reduce the flow of Asia-Pacific capital.