Despite reinsurers globally holding out for meaningful pricing movement after shouldering roughly a quarter of the $80 billion insured losses throughout 2018, S&P Global Ratings expects the modest, increasingly regionalised price increases seen at the January renewals to persist throughout 2019.
Furthermore, the rating agency believes that 2018’s losses exceeded cat budgets woven into the reinsurance sector’s earnings, leading to a return on equity (ROE) in mid-single digits.
S&P points to the rising prominence of third party capital as a “protagonist” behind an anti-climatic January renewal – which saw pricing yet again flat to up about 3% in aggregate – largely echoing the Jan renewals of 2018.
“Despite third-party capital’s rapid growth pausing for now, we think it’s temporary and its ascendance will likely continue,” said S&P’s credit analyst Taoufik Gharib.
An increasingly lively M&A environment is expected to continue throughout the year, as reinsurers seek to carve out enhanced value propositions and defend their competitive positions in response to unrelenting pricing pressure.
Generally, S&P says reinsurers’ strong enterprise risk management programs and relatively still-disciplined underwriting contributed to the industry’s good earnings through the first nine months of last year.
On a pro forma year-end 2018 basis, S&P expects reinsurers’ capital adequacy to remain robust and supportive of its stable ratings.
According to S&P Global Ratings’ U.S economic research rising interest rates have lead to somewhat improved net investment incomes, with inflation remaining under control in most developed nations.
Despite the 2017 cat loss creep experienced by some reinsurers last year, S&P says favourable reserve developments have improved underwriting results during the past several years, a trend that is largely expected to continue.
Concurrently, the negative impact on U.S GDP growth from the ongoing federal government shutdown, Brexit-induced uncertainties and global trade, and continued market volatility with increasing risk premiums will add to an already challenging business environment for the reinsurance sector.
As a result, S&P describes reinsurers as trying to pull whatever levers they can to not only remain relevant but also profitable.
S&P believes Increased capital market volatility plus cat losses in Q4 2018 will turn the quarter to a bad one and the year to a mediocre one, with underwriting results closer to breakeven and an ROE in mid-single digits, likely lower than our initial earnings forecast range of 7%-9% ROE for 2018.
