Q3 earnings could be hit by recent losses

Third quarter results might prove to be more challenging than many re/insurers are expecting, according to one rating agency.

With loss estimates starting to filter through from events including China’s Tianjin explosion in August and the September Chile earthquake, as well as concerns about the Volkswagen recall, Fitch says it might be more uncomfortable for reinsurers than they thought.

“There has been nothing that significant but there is enough to make these losses add up to a disappointing third quarter, given what you might have expected with the lack of natural catastrophe losses,” said Brian Schneider, co-head of Fitch’s global reinsurance sector.

“Add in investment losses, with equity markets experiencing a difficult last quarter, and the results will make interesting reading.”

It could bring more pressure to bear on an already depressed reinsurance market—one which Schneider sees no sign of abating.

“Increased supply of reinsurance and decreased demand—it’s not a good condition for reinsurers,” he said.

“Mergers are likely to continue as these firms seek to increase their market share and potentially add diversity and cost savings.”

However, he warned that mergers and acquisitions (M&A) in itself was not the full answer. He said there were still questions hanging over the coming together of some of the industry’s smaller players such as the Platinum/RenRe and Endurance/Montpelier deals, and that there is still potential for those companies to merge further, but merger was a “good first step”.

“We have a negative watch on PartnerRe as they continue through the purchase process by Exor. Overall we felt that the AXIS deal was probably a positive for the company given that it would have increased their overall market size and increased their diversity. Here is a merger that could go either way depending on how it’s managed,” said Schneider.

Smaller players that “have not found their space” will be ripe for takeover, he warned.

“If you look some years down the road smaller companies such as Endurance or Aspen will likely have to look at their business and decide whether their business model is really going to be successful going forward,” he added.

Fitch has a negative outlook on the reinsurance sector driven by the increased competition and the expectation that pricing is going to continue to come under pressure.

“It’s only going to get worse,” said Schneider, “but the good news is that from a loss standpoint catastrophes have been light so there has not been a lot of claims inflation on the casualty side.”

He warned that if there were to be a series of events, Fitch had some concerns around “how pricing of the business has been in the most recent cycles”.

“There could be companies going under even more stress and that’s something we are watching.”

Going forward, it will be important to be a top 10 player, he said.

“Exor has stated that it wants to be a top four player with PartnerRe so they understand they need to be larger and more relevant, but we don’t want to see companies growing for the sake of growing.

“It’s got to be in the right environment and in a controlled manner, but they are correct in their view that larger is more important in the industry currently and likely to be even more so in the future,” said Schneider.