This year’s catastrophe losses may cause some reflection within the sector and could provide support to current pricing levels, but the underlying prognosis for relatively stagnant pricing trends looks unlikely to shift significantly in 2019, according to S&P Global Ratings.
Furthermore, In the aftermath of last year’s record catastrophe losses the rebound in reinsurance pricing that many expected has been relatively muted and will weigh on reinsurers’ underwriting results.
The firm pointed to profitability falling below the cost of capital on a sustained basis as a potential trigger for revising its outlook on the sector to negative.
Speaking at the 2018 S&P Global Ratings Bermuda Reinsurance Conference, Mario Bonaccorso, Executive Vice President and Chief Financial Officer at PartnerRe said, “We have to start managing our business assuming current conditions persist.”
He added that in an environment of rising interest rates, he’s optimistic on the casualty line of business, but that it won’t all accrue to reinsurers’ bottom lines because pricing, “has to catch up with some inflation of cat losses.”
Still, reports of the death of the pricing cycle have been greatly exaggerated, David Flandro, Global Head of Analytics at JLT Reinsurance Brokers Ltd., told conference attendees.
“What we’re really bad at in this sector sometimes is we take the last three or five years and extrapolate into the future forever,” Mr. Flandro said, adding that he believes the sector reinvents itself every decade or so. “We’re at the beginning of another cycle that’s not disinflationary.”
S&P pointed out that last year the reinsurance sector generated returns on capital of only 1.2%, or 6.3% below its cost of capital–the worst level in more than 13 years.
Despite modest reinsurance price rises following the 2017 catastrophes, the return on capital in 2018 may not materially exceed reinsurers’ cost of capital, given the year-to-date catastrophe losses.
