Reinsurance Pricing Won't Turn This Year, Says Fitch Ratings

The soft pricing in the global reinsurance market will continue for at least the rest of 2017, Fitch Ratings says. This, of course, is good news for captives as buyers of  reinsurance, but it foretells a continued soft insurance market against which group captives and risk retention groups must compete.

Fitch expects premium rates to continue declining, due to large volumes of under-deployed capital and sluggish demand from reinsurance buyers following several years of below-average catastrophe claims. Even if the cost of major losses returns to its historical average, reinsurance prices are unlikely to rise materially, given the abundance of capital in the sector. Catastrophe losses rose in 2016 to their highest level since 2012, but they were still only marginally above the 10-year (2006–2015) inflation-adjusted average.

Declining premium rates and investment yields are expected to weaken profitability, reflected in Fitch’s negative outlook for the reinsurance industry. Fitch forecasts the sector's combined ratio to deteriorate to 92.0 percent in 2017, down from 91.5 percent in 2016 (accident-year ratio excluding catastrophes).

However, Fitch projects most of the reinsurers it rates to maintain credit metrics in line with their ratings over the next 12–18 months, with capital typically above its rating guidelines. Therefore, most ratings have stable outlooks. Some smaller reinsurers with limited business diversification could face negative rating actions if prices drop much further, particularly as pricing has already fallen close to the cost of capital.

Strong capital and lack of organic growth opportunities are likely to drive further share buy-backs, special dividends, and mergers and acquisitions. Share repurchases increased in 2016, led by Swiss Re, which doubled its buy-backs to the largest in the sector, ahead of Munich Re and XL. Notable M&A activity this year includes SOMPO's acquisition of Endurance, and Fairfax's planned acquisition of Allied World.

The report, Global Reinsurers: 2017 Forecast and 2016 Results, is available on Fitch's website (sign-in required).