Fitch revises global outlook to stable

Fitch Ratings has revised its outlook for the global reinsurance sector to stable from negative, saying it believes that earnings have settled at a “new normal”, with return on capital likely to be more modest but less volatile than before.

According to Fitch, it expects that credit fundamentals in the reinsurance sector will continue to reflect intense pricing competition and low investment yields, which will continue to limit profitability, counterbalanced by very strong capital adequacy, robust risk management and generally solid business profiles.

The rating agency said it believes the growth of the alternative capital sector has altered reinsurance market dynamics, making capacity shortages less likely and the underwriting cycle flatter.

This was demonstrated after the large catastrophe losses in 2017, when insurance-linked security (ILS) investors quickly helped to replenish the sector’s capital and premium rate increases were modest as a result.

Graham Coutts, director, insurance at Fitch, said that the US tax reforms, along with the Base Erosion and Anti-Abuse Tax (BEAT), had affected Bermuda, making it less attractive than before.

Fitch had not taken any rating action over this, Coutts said, but it was monitoring the situation on the Island and added that it might make more M&A activity likely.

In a statement on the market as whole Fitch added: “We think alternative capital is here to stay. Investors have been attracted to the reinsurance sector by the benefit of diversifying away from traditional financial markets, rather than simply searching for higher absolute returns.

“Rising interest rates are therefore unlikely to lead to an exodus of capital. Indeed, alternative capacity is likely to continue growing in 2019 against a backdrop of significant ILS issuance in 2018 to date.

“This will keep pressure on reinsurers’ margins, particularly in markets with significant collateralised reinsurance, and this year’s modest pricing momentum after the 2017 catastrophes is unlikely to continue into 2019.”

Fitch concluded by stating that the sector outlook could return to negative if pressure on pricing becomes severe enough to shift profitability below the cost of capital. A positive sector outlook could result if an unexpected exodus of alternative capital leads to a significant improvement in market pricing dynamics.