Weak business conditions and pricing pressure are set to continue in the reinsurance market, with no floor expected to form in the near future, S&P Global Ratings said Sept. 5.

"We do not really see what would bring a rise in prices apart from very significant natural catastrophe," Marc-Philippe Juilliard, director at S&P Ratings told a press briefing in Paris, adding that Hurricane Harvey, which hit Texas and Louisiana in the U.S., was not such an event.

"The other factor … would be a significant rise in interest rates leading to a reduction in central bank intervention, which is largely underway across the Atlantic," he said. However, this had not yet happened in Europe.

S&P Global Ratings is expecting pricing to decline by between zero percent and 5% into 2018.

Business conditions remain soft due to surplus levels of capital on the market and competition is tough between traditional and alternative players, Lotfi Elbarhdadi, senior director at S&P Ratings told journalists.

Traditional capital levels stood at $443 billion in shareholder funds in 2016, according to figures cited by S&P Global Ratings and although it had continued to grow, alternative capital had increased at a much faster pace. Alternative capital stood at $81 billion in 2016, S&P said, citing calculations by Aon.

Alternative reinsurance capital is cheaper and comes from sources such as pensions and hedge funds or insurance-linked securities such as catastrophe bonds.

"We are continuing to see an overcapacity. There is a lot of capital offered on the market compared to demand," Elbarhdadi said.

S&P Ratings' outlook for the sector was stable as solvency levels among reinsurers remained strong, but its outlook in the future would depend on how reinsurers managed difficult market conditions, he said.

The rating agency said in a statement Sept. 5: "If reinsurers' profitability falls sustainably below their cost of capital, we will likely revise our outlook on the sector to negative."

In their presentation, the S&P analysts said that the sector's ability to earn more than its cost of capital had fallen and that its margin was shrinking.

In the first half of 2017, S&P said the reinsurance sector generated returns 1.2% above cost of capital, the lowest level in more than 10 years when excluding years of significant catastrophes.

The sector's return on capital stood at 8.6% in 2016, and S&P said it expected it to fall to be between 5% and 7% by year-end 2017. Cost of capital stood at 6.5% in 2016, and S&P Global Ratings analysts said they expected cost of capital to increase "marginally" for the rest of 2017 and in 2018. The combined ratio in 2017 is expected at between 96% and 100%, while return on equity for the sector at 6% to 8%.

Elbarhdadi anticipated continuing consolidation in the sector as reinsurers seek to diversify their portfolios and strengthen their positions in other markets and cited Arch Capital Group Ltd.'s $3.4 billion acquisition in 2016 of United Guaranty Corp. as an example. Through the deal, Arch Capital is moving away from its core insurance and reinsurance operations into a top mortgage insurer.

"Our point of view on these acquisitions is rather negative … in general these acquisitions require capital expenditure which is significant, " he said, adding that there were always risks involved regarding the benefits of deals.

S&P Global Ratings and Market Intelligence are owned by S&P Global.