The credit rating agency cited three factors impacting reinsurer profitability: intense market competition, depressed prices, and low investment yields. It added that the significant catastrophe losses will drive an underwriting loss for this year.
“Non-life reinsurers’ underwriting results weakened significantly in 9M17 (first nine months of 2017) to a 116% reinsurance combined ratio from 91% in 9M16, because of 28 points of near record catastrophe losses, primarily from Hurricanes Harvey, Irma, and Maria,” read Fitch Ratings’ report. “Each global reinsurer that Fitch tracks reported a 9M17 reinsurance combined ratio over 100%, other than PartnerRe Ltd. at 99%.”
Reinsurers with the greatest proportion of property catastrophe business – RenaissanceRe and Validus – reported the highest combined ratios at 156% and 141%, respectively. For 2018, Fitch Ratings expects a reinsurance combined ratio of 96%, with reinsurance market pricing likely to turn positive.
As for capitalisation, Fitch Ratings noted: “In spite of the sizable catastrophe losses, shareholders’ equity declined by only 1% for Fitch’s group of reinsurers in 9M17 (excluding Berkshire Hathaway Inc.). Double-digit shareholders’ equity declines led to negative rating outlooks at AXIS Capital Holdings Ltd. (13%) and XL Group Ltd (11%).
“Sirius International Insurance Group, Ltd. had the largest decline at 15%, driven by a change in capital structure and catastrophe losses. Fairfax Financial Holdings Ltd. had the highest growth at 47%, due to its acquisition of Allied World Assurance Holdings.”
While the fundamental outlook is negative, the ratings outlook is stable as most ratings are expected to stay at current levels over the next 12-18 months. Fitch Ratings said the sector’s rating outlook could change to negative if there’s a significant development in loss estimates or additional large losses before the end of 2017.
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