Fitch remains negative on reinsurance sector, despite solid profits

Fitch Ratings said that its outlook remains negative for the reinsurance sector in a report published yesterday, saying that the reinsurance market fundamentals continue to be pressured by pricing declines and weakening of terms and conditions.

This despite reinsurers posting impressive results for 2013 and solid profits, said Fitch. The group of reinsurers that the rating agency tracks reported an improvement in calendar year combined ratio taking the measure to 85.4% in 2013, compared with 89.3% in 2012. Manageable levels of catastrophe losses and favourable loss reserve development continue to drive the combined ratio improvement, as evidenced by property catastrophe specialist reinsurers posting the lowest combined ratios.

That four points of difference helped reinsurance firms to solid profits for the year, although underwriting profitability was offset by an adverse change in unrealised investment gain/loss position on fixed maturities and capital market activity, said Fitch. This resulted in muted shareholders’ equity growth in 2013 Fitch noted.

On top of this Fitch noted that premium growth remains marginal, as underwriting and growth opportunities remain limited. Expansion into specialty lines reinsurance, something many large reinsurers have been touting as a panacea to ward off declining catastrophe reinsurance pricing, has been offset to a degree by declining catastrophe business as competition from the growing alternative reinsurance market takes its toll.

Alternative reinsurance capital continues to be a major driver of price declines in property catastrophe reinsurance and this price pressure has now broadened as well-capitalised traditional reinsurers look to avoid the worst of the price pressure. Fitch expects more double-digit rate declines at the mid-year reinsurance renewals.

The outlook remains unchanged then, negative for the sector outlook and currently stable for the rating outlook.

Fitch said:

Fitch’s global reinsurance sector Outlook is Negative, as fundamentals have deteriorated with declining premium pricing and weakening of terms and conditions across most lines, with current market conditions unlikely to improve in the near term. Fitch maintains a Stable Outlook on global reinsurance, as the majority of ratings will be supported by strong capitalization and continued, if declining, profitability, with negative fundamental trends largely factored into current ratings.

It will be interesting to see how the outlook for reinsurer ratings changes as we move through the rest of the year. If the mid-year renewals are as pressured as expected that could increase the pressure on the sectors reinsurers. If we have a significant catastrophe loss event, perhaps due to the impending hurricane season, that could erode some of the reinsurers excess capital, but unless such an event is severe enough to raise pricing it could just result in even more negative pressure on the traditional reinsurance crowd.

The fundamentals of the reinsurance sector remain pressured, according to Fitch, how long until that spreads to the rating outlook?

Here are a selection of recent articles from Artemis which discuss these reinsurance market trends and its outlook:

– The capitalisation of the reinsurance business is changing.

– Reinsurance downside risks grow, June renewals will test: Moody’s.

– Consolidation ahead for smaller reinsurers: Munich Re CFO.

– Reinsurance prices to drop by double-digits at June renewals: Fitch.

– Alternative reinsurance capital grew 28% to $50 billion in 2013: Aon Benfield.

– Capital market threat could be reinsurance game-changer: A.M. Best.

– Watford Re, and start-ups, a blank canvas for reinsurance innovation.

– Reinsurance renewal prices fall by as much as 20% across sector.

– Alternative reinsurance capital to grow to $100 billion: BarCap.

– April’s reinsurance renewals to show alternative capitals influence.

– Traditional reinsurers challenged to compete on cost-of-capital .