Fitch: 2016 Reinsurance sector outlook negative
The reinsurance sector is facing some hard decisions in 2016 as it copes with a cyclical soft market and a shifting market , according to a new report by Fitch Ratings.
Speaking at a briefing on the rating agency’s 2016 global reinsurance outlook, Martyn Street, senior director at Fitch, said that the rating agency is projecting a slight fall in net premiums written, from an actual total in 2014 of $108.1 billion to a forecasted total of $105.9 billion in 2015, with this decline mostly being down to the impact of a stronger dollar and a weaker Euro.
The Fitch outlook said that, at present, there are no convincing signs that the floor to the market has yet been reached, and that current market indicators suggest that the demand for reinsurance will remain subdued in 2016 due to weak global economic demand.
The report also said that it sees catastrophe losses returning to historical levels from the current low level, with combined ratios therefore rising.
However, the rating agency also projects that net income return on equity could fall to the point where some companies might be in danger of negative ratings.
According to Fitch the three key issues for the sector at the moment include the ability to manage change, having convincing reasons for any mergers and acquisitions (M&A) and the continuing impact of alternative capital.
The report claims that the biggest reinsurers are well placed to adapt to and profit from the changing reinsurance market as they have strong franchises and also market positions. In contrast smaller monoline reinsurers might be in trouble due to their lack of diversity or their vulnerability to a natural catastrophe in the areas that they cover.
Fitch predicts continued M&A activity in the sector, but added the caveat that it was unclear how successful the latest round of tie-ups would prove in delivering increased value. Fitch added that it was important for the market to avoid any complacency on this issue.
Street said that the majority of M&A activity is in the medium and small company tiers of the market at the moment, and that a the merger of one small company in a squeezed part of the marketplace with another small company in another squeezed part of the marketplace did not necessarily create a viable proposition for the merged entity.
Fitch also added that alternative reinsurance capital from private equity firms, hedge funds and pension plans are continuing to provide capacity to the market, although the amount of this capital has slowed slightly, particularly from collateralised reinsurance. The report claims that insurance linked securities pricing has stabilised and is disciplined, which means that capital market investors may have a lower future appetite for reinsurance risk, possibly providing a floor for reinsurance pricing.
Although Fitch’s outlook concluded that as things stand at the moment the rating outlook was stable, a shock to capital from a significant catastrophe or disaster could have a severe impact on the market, especially if the event was unexpected or unmodelled.
