S&P: reinsurers likely to barely cover their cost of capital in 2018-19
In a new report S&P Global Ratings said that although the 2017 US hurricane season had a significant impact on returns, they had only been 1 percentage point higher than the cost of capital during the benign first half of 2017.
According to S&P, in 2017 the reinsurance sector reported its worst return on capital in more than 13 years. At only 1.2 percent, it was 6.3 percent below the sector's cost of capital.
S&P said that it expects the sector's return on capital to increase to around 6-8 percent by year-end 2018 due to modest price rises following the 2017 catastrophes. This remains close to reinsurers' cost of capital, which S&P anticipates will increase modestly through the rest of 2018 and in 2019, remaining within the 7-8 percent range.
Although reinsurers were optimistic heading into the January 1, 2018 renewal season, overall reinsurance renewal rates have only modestly increased and the latest renewals show that momentum is weakening. Reinsurers' profitability is hampered by persistent competitive pressures within the property/casualty (P/C) underwriting cycle and low investment returns. S&P anticipate that prior-year reserve releases could also decline, which will add to the earnings pressure.
According to S&P: “Our return on capital forecast is on a consolidated group basis (i.e., including any life reinsurance or primary business), and it incorporates benefit from recent reinsurance rate increases, normalised catastrophe loss expectations, and continued benefit from favourable reserve releases, albeit at lower levels. Our assumption also normalises for the earnings volatility created by new US generally accepted accounting principles (GAAP) accounting guidance on the recognition and measurement of equity investments, effective Jan 1, 2018.”
The rating agency said that it predicts that reinsurers are likely to barely cover their cost of capital in 2018 and 2019. This is entirely different from the situation witnessed in the aftermath of the 2005 and 2011 catastrophe losses, where excess returns were generated off the back of significant rate increases following the heavy catastrophe losses.
