Latin American reinsurers appear set to see their profitability challenged over the next 1-2 years, the global soft market, contracting local economies, high interest rates, risk-based capital solvency regulations and sovereign-constrained ratings, are among many factors making conditions increasingly difficult for regional carriers.
Despite these challenges, Fitch’s rating for LatAm reinsurers is stable, and a silver lining for re/insurance demand levels could come from high 2016 catastrophe loss levels driving growth.
2017 has brought a second year of economic recessions and sluggish growth for the Latin American region; to offset the impact of resulting inflation, governments have raised interest rates; these regional market conditions, coupled with the global reinsurance soft market, have dampened growth opportunities for re/insurers.
And while the interest rate environment creates higher investment yields which favour profitability, Fitch said any benefit to reinsurers’ balance sheets is likely to be “outweighed by adverse market conditions.”
High interest could also mean reinsurers see losses from reduced fixed-rate securities value, particularly if they need to sell investments at a loss to maintain liquidity.
However, major reinsurers remain well placed to adapt and turn a profit despite the changing market with sound market position and knowledge of the regional markets, Fitch said.
The rating agency expects to affirm ratings for most LatAm reinsurers, though a few highly leveraged firms could see downgrades or be given Negative Outlooks, assuming a base case scenario “that over the next 12-18 months most LatAm reinsurers will maintain adequate capitalization and profitability despite softening prices, and that any declines in earnings will be within ranges that current ratings can tolerate.”
Although LatAm reinsurers’ capital and liquidity is expected to remain strong, Fitch expects deteriorating profits in the next 1-2 years to be driven by “further price softening, low net financial income, unexpected shifts in loss ratios, reserve deficiencies, or if pricing proves inadequate to respond to a sizable loss event in the region.”
However, balance sheets remain vulnerable to pressure from high exposure levels to events such as; “persistent increases in loss ratios from higher inflation, multiple high-magnitude catastrophic loss events, significant unrealized investment losses from asset quality deterioration and/or restrictions on upstream dividend payments and other capital movements.”
Regional economic growth is projected for a slow recovery, so it doesn’t look like the challenging conditions are likely to let off anytime soon, but with an overall stable rating and the possibility of re/insurance demand growth in the near future, “considering that insured catastrophe losses in 2016 almost doubled compared to the previous year, which should further motivate coverage acquisition,” LatAm carriers are well-enough equipped to weather the storm.
