Reinsurance price improvements may not be sustainable: Fitch

Having endured the heavy losses of 2017, reinsurers should enjoy an improvement in profits in 2018 as rates improve and cat losses return to normal levels, according to Fitch Ratings.

The rating agency noted that the sector outlook for global reinsurance remains negative given intense market competition, the influx of alternative capital that continues to pressure pricing and persistently low investment yields that strain reinsurer profitability.

However, Fitch's ratings for the global reinsurance sector remain stable, as strong capitalization of most rated entities should allow Fitch to affirm the majority of its ratings over the next 12 to 18 months.

And it now anticipates that reinsurer profitability will improve in 2018, reflecting the normalization of catastrophe losses and marginally improved pricing. The global re/insurance industry endured record catastrophe losses of $144 billion in 2017, driven by hurricanes Harvey, Irma and Maria, as well as California wildfires and Mexican earthquakes.

Fitch forecasts the underlying accident-year reinsurance combined ratio excluding catastrophes to improve slightly to 92.1 percent in 2018 versus 92.6 percent in 2017, reflecting marginal price improvement.

Fitch believes year-to-date reinsurance price improvements may not be sustainable. Despite record catastrophic losses in 2017, rate increases were modest, and the softness of April renewals indicates that price improvement may not be sustainable. The influx of alternative capital (the additional capacity being provided by capital market investors willing to accept lower prices for catastrophic risk) limits cyclical price rebounds historically seen after periods of severe catastrophe losses.

But ROE should rebound in 2018, with modest growth in equity capital levels and an improvement in underwriting results, Fitch said. Investment results and earnings from outside non-life reinsurance should continue to offset potential underwriting losses, which were exacerbated in 2017 by high catastrophe losses and lower reserve releases.

Fitch sees continued M&A activity given limited organic growth opportunities and competitive market conditions. Fitch views larger (re)insurers with increased scale and diversification as better positioned to succeed amid difficult market fundamentals. However, acquisitions are not without risk, particularly in assessing the appropriate valuation for a target company and its reserve levels, as well as the challenges pertaining to execution and efficient integration.

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