Reinsurance profits to decline in 2016: Fitch

Soft reinsurance market conditions are expected to persist through 2016 and as a result reinsurers will struggle to better their results from 2015 this year, making a decline in profits likely, Fitch Ratings explained last week.

Increasing pressure on reinsurance underwriting results, combined with pressure on investment returns, as well as diminishing opportunities to deploy capacity and particularly excess capital, will all conspire to lower reinsurer profitability, Fitch explains.

With no signs of the soft market letting up and investment pressure pushing reinsurers to accept lower returns on assets, or to add risk to their portfolios, the outlook remains difficult and while the reinsurance sector is expected to remain profitable it will likely be at lower levels.

Fitch forecasts that the underlying accident-year combined ratio, excluding catastrophe load, will decline further in 2016 as underwriting margins suffer due to premium rate decreases. However the moderation in rate declines seen at recent reinsurance renewals is expected to continue.

Of course with events such as the Japanese earthquakes in Kyushu, Texas hail and floods, and the ongoing Fort McMurray, Canada wildfire, reinsurers can expect a higher than perhaps expected catastrophe load as well, which could pressure the combined ratio even more.

Global non-life reinsurers that Fitch tracks had an aggregate reinsurance underwriting combined ratio of 86.6% in 2015, up from 86.0% in 2014. That figure should be expected to rise for 2016, as lower margins feed through and the recent catastrophe experience of the market erodes profits further.

“Profit levels will decrease in 2016 across the global reinsurance sector; however, capitalization is expected to remain strong as reinsurers actively manage capital for current market conditions,” commented Brian Schneider, Senior Director at Fitch.

Fitch remains negative on the fundamental outlook for the reinsurance sector, as competition and pricing pressure are forecast to remain high, the rating outlook is maintained at stable given the generally strong balance-sheets expected.

Pressure to merge or acquire is expected to persist, Fitch says, with excess capital needing to be put to work somewhere.

“Industry consolidation is likely to continue in 2016 as reinsurers look for scale to improve profitability; however, Fitch would negatively view any individual deal that is driven solely to achieve greater scale and diversity without a clear strategic rationale,” stated Schneider.

The growth of alternative reinsurance capital is expected to keep the pressure on as well and the key mid-year reinsurance renewals could be a key market juncture, as traditional reinsurers look to maintain footholds in markets where ILS and alternative capital has been growing.

That could result in faster than expected rate declines perhaps, as large global reinsurers look to deploy capacity and excess capital. How competitive the renewals will be remains to be seen, but there is a chance that mid-year will see very high levels of competition, as pricing in key markets like Florida bottoms.

Of course, it is also important to note, that declining underwriting margins do also affect ILS managers, the returns of collateralised reinsurance sidecars, and other ILS investments. Therefore lower profitability for reinsurers can also make it a little harder for ILS funds to meet target returns, making efficiency of capital vital.