Reinsurance sector outlook lifted by Fitch
Fitch Ratings has revised its outlook for the global reinsurance sector to stable from negative, on the belief that earnings have settled at a "new normal".
While the return on capital is likely to be more modest it is also set to be less volatile than before, according to the rating agency.
“We expect 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 agency said.
“We believe 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.
“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.”
The sector outlook could return to negative if pressure on pricing becomes severe enough to shift profitability below the cost of capital, Fitch warned. A positive sector outlook could result if an unexpected exodus of alternative capital leads to a significant improvement in market pricing dynamics.
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