Reinsurers barely cover capital costs

Global reinsurers’ returns are expected to barely cover capital costs in 2018 and 2019 and the current stable outlook on the global property/casualty reinsurance sector would likely change to negative if the industry's profitability sustainably fell below its cost of capital, S&P Global Ratings warned in a report.

In 2017, the reinsurance sector reported its worst return on capital in more than 13 years. At only 1.2 percent, it was 6.3 percent below the sector's cost of capital, according to S&P.

In 2017, insured losses for global natural catastrophe events were an estimated $136.06 billion according to the Swiss Re Institute’s sigma report, a 186 percent increase from $47.56 billion insured losses in 2016.

Operating conditions for global reinsurance remain difficult despite modest 2018 renewal rate increases, S&P noted. The tide of cheaper alternative capital continues to compete with traditional players, who typically have a higher cost of capital, S&P added.

The rating agency expects the reinsurance sector's return on capital to increase to around 6-8 percent by year-end 2018 due to modest price rises following the 2017 catastrophes. This remains close to reinsurers' cost of capital, which S&P anticipates to increase modestly through the rest of 2018 and in 2019, remaining within the 7-8 percent range, according to the report titled "Global Reinsurers' Returns Will Barely Cover Capital Costs In 2018 And 2019".

Although reinsurers were optimistic heading into the Jan. 1, 2018 renewal season, overall reinsurance renewal rates have only modestly increased and the latest renewals show that momentum is weakening. Reinsurers' profitability is hampered by persistent competitive pressures within the property/casualty underwriting cycle and low investment returns. S&P anticipates that prior-year reserve releases could also decline, which will add to the earnings pressure.

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