With rate rises across the vast majority of reinsurance lines of business poised to outpace both loss cost inflation and the challenges of the lower for longer interest rate environment, re/insurers’ underlying profitability should improve in the year ahead, according to analysis by Fitch Ratings.
Although described by some in the market as disappointing, the January 1st, 2021 reinsurance renewals did signal three consecutive years of improvements.
Furthermore, since the arrival of the global pandemic price increases have gained momentum through numerous renewals, with continued firming expected throughout 2021 and into 2022 as premium rate increases take hold, says Fitch.
Over the coming months, the ratings agency expects the U.S. property and casualty (P&C) reinsurance markets, including Bermuda-based re/insurers, to benefit from improving market conditions on the back of elevated natural catastrophe losses and pandemic-related claims.
“Tighter underwriting of commercial lines and normalizing catastrophic losses will support underwriting profits; however, adequate or improved capital returns will continue to be challenged by competitive pressures, lower investment income from persistently lower interest rates, and deteriorating asset quality,” explains Fitch.
As highlighted by re/insurance broker Aon, global reinsurer capital rebounded by the end of the third-quarter of 2020, reaching a pre-pandemic high of $625 billion, aided in part by capital raises from both existing players and startups looking to capitalise on the hardening landscape.
In fact, Bermuda domiciled firms monitored by Fitch raised roughly $7.7 billion of capital in 2020/2021, including common and preferred equity, various debt securities and drawdowns on credit facilities.
Additionally, says Fitch, M&A activity has been somewhat subdued in light of improving organic growth opportunities in the current market. Looking forward, the ratings agency says that this could change and warns that weaker firms could become targets if price improvements fail to mitigate the added stress of COVID-19 losses.
“Fitch maintains a stable rating outlook on both the U.S. P/C insurance and global reinsurance market sectors, with ratings headroom supported by solid business profiles, capital strength, reserve adequacy and effective risk management processes,” notes Fitch.
In light of the hardening marketplace, Fitch revised its outlook for the global reinsurance sector to stable for 2021 back in December.
