Reinsurers’ 2017 combined ratios expected to nudge 100%
Reinsurers’ underwriting performance declined in the first half of 2016 due to higher natural catastrophe losses – and the negative trend is set to continue into 2017, according to Fitch Ratings.
Overall non-life reinsurers’ underwriting results deteriorated in the first half of 2016 to a 93 percent combined ratio from 88 percent in the same period a year ago as the majority of companies posted higher natural catastrophe losses.
But Fitch expects the reinsurance sector’s combined ratio to deteriorate further to 94.2 percent in 2016 and 99.2 percent in 2017, due to falling reinsurance prices, reduced reserve redundancies and catastrophe losses increasing to long-term historical averages.
In the first half of 2016, Partner Re, Swiss Re, Lloyd’s and Hannover Re posted some of the highest combined ratios among the companies included in the sample of non-life reinsurers selected by Fitch. At the lower end were Validus, RenRe, Endurance and Chubb.
Fitch expressed concern about reinsurers’ deteriorating financial results as underwriting margins and investment returns continue to fall. Net income return on equity (ROE) dropped below the 10 percent threshold to 9.2 percent in the first quarter of 2016. Fitch forecasts ROE to decline further to 8.5 percent in 2016 and 8 percent in 2017, with both underwriting and investment results under pressure.
The ratings agency warned that individual negative rating actions are possible if an underwriting loss or a sub-10 percent ROE indicate a significant impairment in a company’s financial performance.
In order to reduce pressure on profitability as prices continue to drop in property and catastrophe business due to competition with alternative markets, reinsurers are expanding into casualty/specialty lines, according to Fitch.
