As the reinsurance market rapidly approaches the key June and July renewals, Fitch Ratings says that it expects a continued decline in prices and further weakening of terms and conditions, as the market battles to put excess capital to work.
In its latest global reinsurance dashboard, rating agency Fitch makes it clear that it sees no end to the difficult conditions that traditional reinsurers have been facing.
Fitch’s outlook for the global reinsurance sector has been negative since early 2014, based on intense competition and sluggish demand impacting traditional reinsurers and causing a soft market.
However it maintains a stable outlook for reinsurers ratings, based on an expectation that they will continue to be able to maintain profitability and balance sheet strength, commensurate with their ratings, over the coming 12 to 18 months.
Underwriting results have been favourable, thanks to the continued below normal level of major losses affecting global reinsurance capacity, however results are declining, according to Fitch.
Reduced margins thanks to softer reinsurance rates, increased non-catastrophe property losses, higher expense ratios thanks to raised ceding commissions and a slight decline in favourable reserve development, are all combining to erode profitability, Fitch says.
Non-life reinsurance premium growth has stagnated, according to Fitch, with a decline apparent in 2014 if Berkshire Hathaway is removed from the equation. This stagnation in net premiums written is a result of flat or declining prices across both property and casualty reinsurance lines, as well as a reduction in demand, the rating agency said.
Despite all this, reinsurers continue to manage their capital prudently, Fitch say, with shareholders equity still increasing through the last year, thanks to solid earnings and unrealised investment gains.
The downside to this is the abundance of traditional reinsurance capital, which alongside continued interest from the capital markets, institutional investors and ILS players, leads Fitch to believe that prices will continue to decline, while terms and conditions continue to weaken, at the upcoming June and July renewals.
It seems likely that price declines will begin to moderate, with observers already suggesting that reinsurance rate decreases will be lower in June and July than seen in January, or a year ago. However any continued slide in returns, combined with further expansion of terms, will result in reinsurers exposures growing once again.
That may result in a greater use of retrocession or arbitrage opportunities through industry loss warranties (ILW’s), in fact markets suggest that ILW volumes offered for June renewals appear to be up as both reinsurers and ILS managers seek to protect their capital from peak exposures.
The negative outlook on reinsurance remains and likely won’t go away until we see some major event that drains capital from the space. When that will happen is anyone’s guess. For those reinsurers whose returns are beginning to look more pressured, it likely cannot come soon enough.