Fitch Ratings has said that all global reinsurers it measures in its Prism Factor-Based Capital Model remained ‘strong’ in terms of capital adequacy at the end of last year.
The firm partly attributed this to a ‘significant improvement’ in earnings and strong risk-management capabilities that helped to offset capital consumption from business volume growth.
Fitch singled out several factors in making its determination: moderate leverage, elevated large losses, improved earnings, very strong company profiles, and prudent reserving standards.
Around leverage, it said that it assessed the financial leverage ratios within its peer group as low to moderate, and between 17% and 31% at the end of last year.
It added: “This was almost unchanged compared to the 2020 levels, as reinsurers increasingly managed to finance growth in a hardening market environment through retained earnings.”
The firm did note that all global reinsurance peers had elevated large losses in 2021 that were the result of natural catastrophes, while secondary-peril events also proved costly.
It said: “Those reinsurers with significant life reinsurance operations also were negatively affected by excess mortality claims linked to the Covid-19 pandemic.”
It added: “Despite the high large loss burden, profits of this peer group improved substantially in 2021 compared to 2020. The average return on equity increased to 8.3% in 2021 from 2.2% in 2020, which is in line with Fitch’s criteria guidelines range for the ‘a’ rating category. Better prices and lower non-life Covid-19 claims drove the improvements. We expect profits to consolidate in 2022 as further price increases broadly offset inflationary pressures.”
The only firm that Fitch considered not to be in the top tier of global reinsurers among its peers was PartnerRe.
It said: “A high degree of diversification underpins our assessment of their very strong company profiles. We view PartnerRe’s strong company profile as ’Moderate’ compared with its global reinsurance peers, driven by a moderate operating scale and business risk profile.”
However, it did say that it expected all reinsurance peers to ‘continue to reserve with prudence and discipline’, which it said were two factors that underpinned high reserving standards and would help to counter mounting risks from higher inflation.
