A new report from Fitch Ratings says that the global reinsurance market faces soft pricing for at least the rest of 2017.
In the report, entitled ‘Global Reinsurers: 2017 Forecast and 2016 Results’ the rating agency said that it expects premium rates to continue declining. It blamed this decline on large volumes of under-deployed capital along with sluggish demand from reinsurance buyers following several years of below-average catastrophe claims.
The report also claims that even if the cost of major losses returns to its historical average, 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 were still only marginally above the 10-year (2006-2015) inflation-adjusted average.
Fitch Ratings said that it expects declining premium rates and investment yields to weaken profitability and that this was reflected in its negative outlook for the sector.
The rating agency said that: “We forecast the sector's combined ratio to deteriorate to 92.0 percent in 2017 from 91.5 percent in 2016 (accident-year ratio excluding catastrophes).
“However, we project most of the reinsurers we rate to maintain credit metrics in line with their ratings over the next 12-18 months, with capital typically above our rating guidelines. Most ratings therefore 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.”
Fitch Ratings concluded by saying that strong capital and lack of organic growth opportunities are likely to drive further share buy-backs, special dividends and M&A. 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.
Fitch Ratings, Reinsurance, Global