Reinsurers profitable in H1 but underwriting results deteriorate: Fitch

The outlook for reinsurance firms is worsening, according to Fitch Ratings, with combined ratios on the rise, non-catastrophe property losses up, margins shrinking and overall an environment that is seeing reinsurers underwriting results deteriorating.

Fitch published its new Global Reinsurers’ 1H14 Results Dashboard today, which shows that the group of global reinsurers it tracks generated a calendar-year reinsurance combined ratio of 87.4% in 1H14, up from 85.9% a year earlier.

The weaker results that Fitch observed are partially a reflection of the increasing pressure on reinsurance margins, as well as an increase in occurrence of non-catastrophe property losses that have affected a number of reinsurers and a higher expense ratio as ceding commissions increased.

In terms of growth, the group of reinsurers only recorded marginal premiums increases, reflecting a limited number of new underwriting opportunities. We would also suggest that this is a reflection of the increased competition, among themselves, as well as the increasing amount of the reinsurance market which is now underwritten on collateralized paper by insurance-linked securities (ILS) specialists. Non-life reinsurance net premiums written (NPW) increased approximately about 2.6% in 1H14 compared with 1H13 reflecting flat or declining prices.

A number of reinsurers reported net premiums written declining, due to the increased competition, influence of the capital markets, as well as the reinsurers decisions to pull-back on some lines due to prices being insufficient. The largest declines were at RenaissanceRe (RenRe; 24%), Platinum Underwriters (8.9%) and Validus Holdings (8.8%), who all reduced their property catastrophe reinsurance business.

At the same time, traditional reinsurers are increasingly moving away from the highly competitive and price pressured property catastrophe reinsurance market, since premiums there are rapidly becoming inadequate for some reinsurers to maintain their costs of capital.

Shareholders’ equity among these reinsurers grew an average of 5.2% in 1H14 from year-end 2013, as solid earnings and unrealised gains on fixed-income securities continued to mount. Some of these gains were partially offset by continued share repurchases from reinsurers and there is an expectation of more capital being returned in the second-half as well.

Fitch expects pricing in reinsurance will continue to fall, as competition among traditional players remains high while alternative reinsurance capital continues to show interest in the sector. As well as price declines continuing, Fitch expects terms and conditions will continue to weaken into 2015 as well.

Fitch maintains its negative outlook of the reinsurance sector and its stable outlook on reinsurers ratings, suggesting that while still under pressure no specific downgrades are foreseen yet, so the majority of reinsurers will be able to maintain adequate profitability and capitalisation so that earnings will be within the range that current ratings can tolerate.

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