Fitch Ratings has provided a stable outlook for the global reinsurance sector for 2020, largely driven by subdued profitability, historically low risk-adjusted prices and low investment yields persisting amid a weak global economic outlook.
The rating agency adds that the outlook is partly down to the high quality of its ratings universe, skewed towards reinsurers with very strong business profiles and capital.
Following two consecutive years of heavy catastrophe losses, Fitch says reinsurance price rises have picked up momentum in 2019.
Improvements on the reinsurance treaty side are in a large part driven by even bigger pricing hikes in the primary markets.
The Lloyd’s market-wide profitability review and the impact of a number of large global carriers re-positioning their portfolios improved the underlying primary rating environment, in turn benefiting reinsurers.
On the casualty side, Fitch says continued concerns over reserve redundancies and loss severity have resulted in improved terms but it remains to be seen whether rate improvements are enough to match underlying risk.
Fitch expects traditional capital to remain strong in 2020. Reinsurers have demonstrated the resilience of their balance sheets to cat losses as capital remained robust despite heavy losses in 2017 and 2018.
Additionally, Fitch points out that while traditional capital still dominates reinsurance, alternative capital in recent years has become an increasingly important sector in the market.
Fitch is also anticipating a slowdown of mergers and acquisitions activity and says that, as a result of improving market conditions, market valuations for potential targets are rising.
However, players unable to take advantage of current opportunities will be more vulnerable to a take-over when the market turns soft again.