Soft reinsurance market won’t turn in 2017: Fitch

Premium rates are set to further decline in reinsurance throughout 2017 due to overcapacity and sluggish demand, according to Fitch Ratings.

The ratings agency expects premium rates to continue declining, due to large volumes of under-deployed capital and sluggish demand from reinsurance buyers following several years of below-average catastrophe claims. Even if the cost of major losses returns to its historical average, prices are unlikely to rise materially given the abundance of capital in the sector. Catastrophe losses rose in 2016 to their highest level since 2012 but were still only marginally above the 10-year (2006-2015) inflation-adjusted average, Fitch said in its report titled “Global Reinsurers: 2017 Forecast and 2016 Results”.

“We expect declining premium rates and investment yields to weaken profitability, reflected in our negative outlook for the sector. We forecast the sector's combined ratio to deteriorate to 92.0 percent in 2017 from 91.5 percent in 2016 (accident-year ratio excluding catastrophes),” analysts wrote.

Some smaller reinsurers with limited business diversification could face negative rating actions if prices drop much further, particularly as pricing has already fallen close to the cost of capital.

At the same time, strong capital and lack of organic growth opportunities are likely to drive further share buy-backs, special dividends and mergers and acquisitions. Share repurchases increased in 2016, led by Swiss Re, which doubled its buy-backs to the largest in the sector, ahead of Munich Re and XL. Notable M&A activity this year includes Sompo's acquisition of Endurance, and Fairfax's planned acquisition of Allied World.

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