Fitch: Reinsurance Pricing Won’t Turn This Year

May 16, 2017 | 0 Comments

The soft pricing in the global reinsurance market will continue for at least the rest of 2017, Fitch Ratings says.

“We expect premium rates to continue declining, due to large volumes of under-deployed capital and sluggish demand from reinsurance buyers following several years of below-average catastrophe claims,” the ratings agency said.

“Even if the cost of major losses returns to its historical average, prices are unlikely to rise materially given the abundance of capital in the sector. Catastrophe losses rose in 2016 to their highest level since 2012 but were still only marginally above the 10-year [2006-2015] inflation-adjusted average.

“We expect declining premium rates and investment yields to weaken profitability, reflected in our negative outlook for the sector. We forecast the sector’s combined ratio to deteriorate to 92.0% in 2017 from 91.5% in 2016 [accident-year ratio excluding catastrophes].

“However, we project most of the reinsurers we rate to maintain credit metrics in line with their ratings over the next 12-18 months, with capital typically above our rating guidelines. Most ratings therefore have Stable Outlooks. Some smaller reinsurers with limited business diversification could face negative rating actions if prices drop much further, particularly as pricing has already fallen close to the cost of capital.

“Strong capital and lack of organic growth opportunities are likely to drive further share buy-backs, special dividends and M&A. Share repurchases increased in 2016, led by Swiss Re, which doubled its buy-backs to the largest in the sector, ahead of Munich Re and XL. Notable M&A activity this year includes Sompo’s acquisition of Endurance, and Fairfax’s planned acquisition of Allied World.

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