A flurry of special dividends from London Market insurers shows they are not chasing potentially unprofitable business and therefore not increasing the risk of big losses that could damage their capitalisation and weaken their credit profiles, according to Fitch Ratings. It expects more firms, including the major European reinsurers, to announce special dividends or share buybacks, given weak pricing and the abundance of capital available after another benign year for catastrophe losses.

Fitch says London Market insurers are well capitalised and do not need to retain all their cash to strengthen capital. The alternative was therefore to put it towards writing new business at rates that might not meet their return hurdles or support M&A, storing up risk for the future. In the last few days, Amlin, Hiscox, Beazley, Catlin and Novae have all announced special dividend payments to shareholders.

Low prices have been mainly driven by limited catastrophe losses over the last few years, because price increases generally follow major loss events. This has been exacerbated by the rapid growth in alternative insurance and reinsurance products, such as catastrophe bonds, as investors searching for better yields have pumped cash into the sector.

The rise of alternative capital is one of the key risks for reinsurers, which Fitch expects to become a permanent fixture in the industry because of the portfolio diversification it offers investors and the lack of correlation between catastrophe risk and other investment risks. This will probably lead to further declines in reinsurance pricing if catastrophe losses remain low.

The impact will be greatest on property catastrophe reinsurers as they compete more directly with alternative capital. But there are also potential benefits that mitigate the impact. For example most London Market insurers benefit from lower reinsurance and retrocession costs as they are paying less to reinsure their risks. Alternative capital may also offer a new source of fee income as some London market players have partnered with facilities focused on investing in insurance linked securities

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