Reinsurance sector facing sluggish 2017

Reinsurance pricing will remain soft through the rest of 2017, with consolidation in the industry expected to continue, according to a new report by Fitch Ratings Inc. 

Fitch expects only slight premium growth in 2017, forecasting the underlying accident-year combined ratio excluding catastrophes to deteriorate to 92.0% in 2017 from 91.5% in 2016 as underwriting margins weaken due to premium rate pressures, the New York-based ratings agency said in its report released Monday.

“The softening reinsurance market continues due to large volumes of underdeployed capital and sluggish demand from reinsurance buyers, despite increased catastrophe losses in 2016,” the report stated. “Fitch expects pricing conditions to remain challenging at the midyear 2017 reinsurance renewals. Current pricing levels are approaching the cost of capital, so further material price drops could lead to negative rating actions on some reinsurers.”

The fundamental outlook for the reinsurance sector is negative as premium prices and investment yields are expected to continue to decline, but the rating outlook remains stable overall for the sector, according to Fitch. However, smaller reinsurers with more limited diversification face a greater risk of negative rating action, according to the report. 

The property/casualty reinsurance sector’s profitability took a hit from natural catastrophes in 2016, with the 25 reinsurers tracked by Fitch posting a calendar-year reinsurance combined ratio of 91.1% in 2016, deteriorating from 86.7% in 2015. Catastrophe losses added 6.4 points to the reinsurance combined ratio for the group in 2016, up from 3.5 points in 2015, according to the report. 

Insurers and reinsurers “posted higher, albeit manageable, catastrophe losses of $54 billion in 2016, up from $38 billion in 2015 and slightly above the $53 billion 10-year average,” Fitch said, with the most significant 2016 events including the Fort McMurray wildfire in Alberta, Canada, earthquakes in Japan and New Zealand, and Hurricane Matthew in the United States. 

Reinsurance sector merger and acquisition activity is likely to continue in 2017 as companies face limited organic growth options and desire enhanced scale and diversification, according to Fitch. 

“Reinsurers experienced heightened M&A activity in recent years as a strategic option to combat reduced growth opportunities amid growing reinsurance market weakness,” the report said. “Entities with reinsurance operations have become a popular acquisition target for foreign companies seeking to diversify and deploy capital abroad.”

Notable M&A activity this year includes Tokyo-based Sompo Holdings Inc.’s $6.3 billion acquisition of Hamilton, Bermuda-based Endurance Specialty Holdings Ltd., completed in March; and Toronto-based Fairfax Financial Holdings Ltd.’s planned $4.9 billion acquisition of New York-based Allied World Assurance Co. Holdings A.G.