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Competition and low investment yields are making life difficult for insurers and reinsurers, Fitch Ratings Inc. said Monday, particularly in the United States and the United Kingdom.
The Chicago-based ratings company said in a report called Global Insurance: Key Rating Drivers, Sensitivities and Risks that these factors support Fitch's negative outlooks on the reinsurance and non-life insurance sectors.
“In the U.S. and UK, non-life insurers continue to have difficulty implementing premium rate increases necessary to generate sufficient underwriting returns and adequate returns on capital,” the report said. “This pressure is felt most acutely in automobile lines and commercial property insurance.”
The report noted that the reinsurance sector continues to be exposed to large earnings swings due to catastrophe losses. Fitch said the sector’s weak financial performance is expected to continue due to intense marketing competition, significant alternative capital and persistent low interest rates.
The reinsurance sector’s reserve redundancies are declining, the report said, and are unlikely to support earnings to the extent they have in recent years.
"Fitch is keeping a close eye on key macro risks throughout the world including a possible negative turn in the credit cycle, a more rapid than anticipated increase in interest rates, and a potential deceleration of growth in China,” Mark Rouck, Fitch's group credit officer for insurance, said in a statement.
The report said the U.S. health insurance sector’s key drivers and sensitivities are linked to consolidation pressure generated from participants’ struggles to take costs out of the system.
“Transactions in which Aetna Inc. and CVS Healthcare and Cigna Corporation and Express Scripts, respectively, plan to combine would add significant debt, integration and execution risks to the companies’ profiles,” the report said.
U.K.-based Fitch Ratings Ltd. said that continued competitive pressures, the effects of U.S. tax reform and catastrophe losses in 2017 are likely to lead to more mergers and acquisitions among insurers and reinsurers especially in Bermuda this year, Bernews reported. The ratings agency said that an increase in scale and diversification resulting from mergers could increase the resilience of insurers to market challenges, however, merger execution and integration risks could pose risks to profitability.