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Fitch forecasts reinsurance underwriting profits for 2021

13th April 2021 - Author: Matt Sheehan

Analysts at Fitch Ratings have forecast an aggregate combined ratio of 99.1% for reinsurer in 2021, meaning the industry is expected to post slight underwriting profitability for the year.

This combined ratio reflects 9.0 percentage points of catastrophe losses, 1.5 points for additional coronavirus losses and 1.0 point of reserve releases.

Likewise, the underlying accident-year combined ratio, excluding catastrophes and coronavirus losses, is expected to improve to 89.6 % in 2021, down from 90.5% in 2020 and 92.9% in 2019, as reinsurance rate rises across almost all business lines outpace loss cost inflation .

Fitch also forecasts a 6.5% return on equity (ROE ) in 2021, in line with the estimated 6% –7% cost of capital, as operating results remain stressed with record low investment yields.

Following continued rate increases at the January and April 2021 renewals, analysts expect pricing momentum to continue through the mid-year period, possibly losing steam in 2022.

Pricing has been supported by the sizeable loss events from 2020, as well as a surprisingly active Q1 2021, which has seen re/insurers take losses from US winter storms, flooding in Australia and the Suez Canal blockage.

Non-life reinsurers have now suffered four consecutive years of underwriting losses, posting a reinsurance combined ratio of 105.1% in 2020, up from 101.0% in 2019, according to Fitch.

This reflects 9.7 percentage points from the pandemic and 6.5 points from catastrophes, primarily from Hurricanes Laura, Sally and Isaias, western US wildfires, and US midwest derecho.

Meanwhile, favourable reserve development fell to only 1.6 percentage points in 2020 from 2.3 points in 201 9, partially due to increases in casualty claims severity from deterioration in loss costs trends.

Fitch’s sector outlook for global reinsurance in 2021 remains stable, reflecting hardening pricing conditions and stabilising pandemic-related claims, although with depressed investment income as a result of ultra-low interest rates.

However, the rating agency is confident that the solid business profiles and very strong capitalisation of most reinsurers should lead to affirmations for the majority of its ratings over the next 12 –24 months.

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