Fitch revises global reinsurance sector outlook to ‘improving’

Fitch Ratings has revised its outlook for the global reinsurance sector to ‘improving’ from ‘neutral’ to reflect the sector’s strengthening financial performance into 2024.

Speaking at a media briefing ahead of the Rendez-Vous de Septembre conference kicking off in Monte Carlo this weekend, Robert Mazzuoli, EMEA head of reinsurance at Fitch Ratings, explained that headwinds in the sector had weakened as tailwinds gathered strength this year, tilting the balance in favour of the reinsurance sector.

Among the sector’s positives, the analyst highlighted “significant” price increases – varying across lines of business – as well as better terms and conditions for reinsurers at the expense of cedants.

“Terms and conditions are stickier and it is difficult for reinsurers to change them or improve them so the fact that they have managed to push these through is really a positive for the sector”, he explained.

Rising reinvestment yields was a second factor explaining the improving outlook. Mazzuoli suggested that with the average portfolio having a duration of between four to five years, this meant that 20 to 25 percent of the portfolio was being reinvested at a higher yield, gradually feeding into higher investment income.

Aside from this, demand for reinsurance continued to be high, while capacity in many lines of business remained limited.

Among the headwinds, the analyst suggested the strong pickup in inflation last year had taken the sector by surprise, but price acceleration was now trending downwards and, more importantly, reinsurers had had time to react to it.

“As long as we don’t get any big negative surprises this year, then inflation should no longer be a major topic for the sector,” said Mazzuoli.

The analyst also suggested that this year, smaller incremental increases in interest rates and a stronger equity market had alleviated pressures related to unrealised losses, which had become “a smaller headache for the industry”. This contrasts sharply with the big rise in interest rates last year, which had prompted significant unrealised losses in investment portfolios amidst weak equity markets.

Among other headwinds, Mazzuoli focused on natural catastrophes which he said had not been adequately priced in the past.

However, he highlighted reinsurers had now managed to push more of the burden to cedants compared with two years ago, as a result of better terms and conditions and higher retentions as well as a shift away from aggregate covers.

Upgrades in the pipeline

Fitch’s ‘improving’ sector outlook reflects the rating agency’s positive expectation of credit trends ahead, including the distribution of rating outlooks across 20 rated reinsurance entities.

As of August, there have been no upgrades or downgrades among Fitch’s rated reinsurers, compared to five downgrades and two upgrades last year.

Meanwhile the rating agency maintains positive outlooks on two reinsurers, with one of these being linked to the positive outlook for the corresponding sovereign, and the other corresponding to a more favourable assessment of the reinsurer’s company profile and operating performance.

“When we look at the distribution and see that we have 10 percent on a positive outlook and nothing on the negative side, that gives you an indication of the direction that we’re heading,” Mazzuoli said.

“It is possible that the share of these positive credit outlooks might increase over the next couple of quarters,” he added.

In terms of the forecast for the full year and 2024, Fitch said it expects premium growth to continue, although at a reduced rate, with cat losses likely to be “more normal, and probably less for impact ratios than they have been in recent years.”

Meanwhile, reserve development will continue to be favourable, at around 2 percent, leading to a calendar year combined ratio forecast of 93.8 percent for 2023 and 94.0 percent for 2024, down from 97.2 percent in 2022.

“So very solid results, assuming sort of more normal natural catastrophes,” said senior director Brian Schneider.

The sector is expected to maintain very strong capital adequacy, with shareholders’ equity forecast to increase by around 12 percent.

Meanwhile, net income return on equity is forecast to rise to 13.9 percent in 2023 and 13.6 in 2024, up from 3.5 percent last year.

“This would be the first time in a decade that we’ve seen returns above the cost of capital,” said Schneider.

‘Calmer’ results expected at 1.1

Last year’s Monte Carlo discussions were defined by reinsurers standing their ground and withdrawing capacity from certain areas.

However, Fitch analysts said they assumed most of the portfolio adjustments had already been done, so they were not expecting any additional big changes in the structure of property cat exposures in the portfolio.

“Certainly, price adjustments will remain core in the discussion so we would expect further price increases, albeit on a lower level, but we would not expect any additional withdrawals of types of coverage or layers,” said Mazzuoli.

The analyst highlighted that with inflation rates still remaining high globally, some “fine-tuning” of attachment points and limits would be required, but that the “heavy lifting” had already been done over the last cycle.

Meanwhile Schneider suggested that a certain equilibrium had been reached already, “and a big part of that is the alternative space, which has also pushed forward for higher rates and higher returns”.

“It’s going to take an increase in new capital coming in for that to want to change and while you’re seeing some of that at the margin by individual companies looking to take advantage, we really haven’t seen a big wave of new capital coming in.”

Yesterday, S&P Global Ratings revised its outlook for the global reinsurance sector to stable from negative, citing favourable P&C reinsurance pricing conditions that will allow carriers to earn their cost of capital in 2023-2024.