Q3 cat losses push reinsurance sector to 2017 underwriting loss

The significant third quarter 2017 catastrophe losses will push the global reinsurance sector to an underwriting loss for the year, according to Fitch Ratings.

The agency forecasts a 2017 aggregate combined ratio of 109.7 percent for the global reinsurance sector, the weakest since 2011.

Catastrophe losses incurred from Hurricanes Harvey, Irma and Maria, coupled with the sizeable losses from the earthquakes in Mexico and wildfires in California represent a significant percentage of capital for some reinsurers, leading to negative outlooks for several companies' ratings.

Fitch believes that significant development in loss estimates or additional large loss events before year-end could change the sector's rating outlook to negative from stable.

The majority of reinsurer rating outlooks remain stable, according to Fitch. However, the ratings of XL Group and AXIS Capital Holdings have recently been revised to negative, while Lloyd's of London was maintained on negative outlook and Fitch believes that the third quarter catastrophe losses have placed further pressure on the negative outlook.

Fitch's fundamental outlook for the reinsurance sector remains negative. Intense market competition and the endurance of alternative capital have depressed prices in recent years. Low investment yields, which Fitch expects to persist, put further strain on reinsurers’ profitability.

However, the very strong capitalisation of most rated entities means that they remain well positioned to take advantage of any pricing improvement at 1/1 renewals and beyond following the third quarter events.

Fitch expects reinsurance rates to increase as a result of the significant catastrophe events in the third quarter, particularly on US catastrophe exposed lines and in the retrocessional market. A key driver of the magnitude of future rate increases depends on the insurance-linked securities market's appetite to invest more capital in reinsurance. The amount of capital that remains "trapped" by lengthy claims settlements or protracted litigation, particularly in relation to hurricane Harvey flooding losses, will also influence the degree that rates rise.

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