Reinsurers’ profitability is expected to remain under pressure in the coming months but returns could improve on 2016 if attritional losses from catastrophe events remain low, according to analysts at Keefe, Bruyette & Woods (KBW).
According to analysis and commentary from KBW reinsurers produced an average return on equity (ROE) of 8.1% in 2016 and book value per share (BVPS) growth of 8.4%, compared with 9.9% and 6.1% in 2015, respectively.
The decline in ROE, says KBW, was driven by a more normalised catastrophe year, with insurance and reinsurance industry losses being the highest for four years, according to some industry estimates.
For the coming year KBW expects reinsurers to produce an average ROE of 8.8% and BSVP growth of 7%, and a core margin improvement of 20bps, excluding catastrophes and reserve developments.
“We expect continued pricing pressure will be offset by lower attritional losses in 2017,” says KBW, suggesting that reinsurers could achieve greater profits in 2017 than last year, so long as attritional losses remain low.
However, industry reports already recorded more than $1 billion of weather losses in the U.S. alone during January, with further reports of convective storm losses accelerating in 2017.
Reserves have been a hot topic of discussion in the global reinsurance market during the softening landscape, with some companies aggressively releasing reserves to bolster underwriting profitability, which, like investment income, has been challenging to achieve at desirable levels.
In 2016 reserve releases decelerated to year-on-year to a still favourable 7.6%, as a percentage of earned premiums, and KBW expects this trend to continue in 2017. With this in mind KBW warns investors to be more cautious currently, as certain “carriers have been strengthening certain lines of business.”
“The most significant topics to watch in 2017 are the strength of reserves and potential for rising loss costs if inflation increases as well as U.S. corporate tax reform, which could invite more competition into a space that has already seen significant pricing pressure, and the possibility of a border adjustment, which could have industry-wide repercussions and even affect future M&A,” said KBW.