Fitch Ratings has maintained its negative outlook for the reinsurance sector as mid-year 2017 results show continued pressure on pricing and earnings. Ample capacity and intense competition remains an issue for the global reinsurance sector, and Fitch expects pricing to weaken further in the months ahead.
Despite the abundance of capacity and low-interest rate environment adding further pressure to global reinsurance companies, the low-level of catastrophe losses helped firms maintain underwriting profitability in the first-half of 2017, says Fitch.
However, the underwriting profits of non-life reinsurers did decline in the opening six months of the year in light of lower surpluses from prior-year reserves. Fitch explains that many firms felt the impact of the Ogden rate change in H1 2017.
Catastrophe losses were lower in the first-half of the year, down 39% when compared with the same period in 2016, and some 33% lower than the ten-year average. This, explains Fitch, helped reinsurers maintain underwriting profits in H1 2017 with cat losses adding 4.1 points to the group’s combined ratio in H1 2017, compared with 6.3 points a year earlier.
“Non-life reinsurers’ underwriting results weakened in 1H17 as lower catastrophe losses were more than offset by reduced favourable reserve development. The group of 19 reinsurers that Fitch tracks posted a calendar-year reinsurance combined ratio of 94.6% in 1H17, up from 92.5% in 1H16. Twelve group members reported a higher reinsurance combined ratio in 1H17 than in 1H16,” explains Fitch.
Underlining the impact of the Ogden rate change, Fitch notes that the group’s first-half 2017 results included 3.2 points of favourable prior-accident-year reserve development, compared with 6.7 points in H1 2016.
Currently, Fitch maintains its stable rating outlook for the sector in light of the industry’s strong capital levels, but does warn that should pricing metrics deteriorate further this could lead to negative rating actions. And, with little sign the market is going to turn anytime soon, absent a truly significant loss event, reinsurers are likely to come under increasing pressure and profits could deteriorate faster than some in the space anticipate.
The group of non-life players tracked by Fitch also saw return on equity (ROE) deteriorate in H1 2017, falling from 8.9% in H1 2016 to 8.7%, which Fitch says is a reflection of the low-interest rate environment and continued reduction in underwriting income.
“Fitch expects pricing conditions to remain challenging at the January 2018 renewals, with rate declines continuing in mid-single digits due to large volumes of under deployed capital and flat demand from reinsurance buyers, following several years of below average catastrophe claims. This would represent the sixth straight year of a pricing drop as rates have not increased since 2012, following record global catastrophe losses incurred in 2011,” explains Fitch.
Adding further pressure to the profits of non-life reinsurers in H1 2017 was the record-level of catastrophe bond issuance, says Fitch.
For the life sector the story was different in H1 2017, with net premiums increasing by 5% when compared with the previous year, and pre-tax income increasing by 14.5% when compared with the previous year, according to Fitch.
Fitch clearly expects pricing in the sector to remain pressured and deteriorate further in the months ahead and into 2018 and, should catastrophe losses normalise some firms could themselves in a very challenging position. Furthermore, with reserves falling across the sector some might find it difficult to offset falling underwriting profits in the highly competitive and overcapitalised marketplace, especially if losses start to normalise somewhat.
