Fitch Ratings changes global outlook to neutral; Past prices

Fitch Ratings announced it had changed its outlook on the global reinsurance sector to neutral yesterday, but the downgrade came with an expectation of continued profitability – and a forecast combined ratio of around 90 in 2025.

The revision — from a previous “upgrade” outlook — reflects Fitch’s view that the pricing cycle is likely past its peak.

Related: Global non-life reinsurer profits to peak in 2024: Fitch Rating mid-year analysis

“The sector is currently in very good shape, with very strong capitalization and record financial performance by historical standards,” said Manuel Arrivé, director of Fitch Ratings and head of EMEA Reinsurance. “We expect both balance sheets and profitability to remain resilient in 2025, but further improvement in fundamentals from this point is less likely,” he said during a webinar yesterday.

Essentially, he said, the neutral outlook means Fitch expects the main credit drivers for the sector to remain broadly stable over the next 12 months.

Arrivé highlighted the positive and negative factors that lead to a change in perspective. On the positive side, persistent underwriting discipline, along with comfortable capital buffers that have been supported by record profits in 2023 and the first half of 2024, both position reinsurers well for a decline in prices – even if claims costs and, in especially, losses from catastrophes continue. to stand up

On the downside, Arrivé said the reinsurance market has actually started to soften.

“Capital has grown faster than demand and that’s narrowed the gap in property, for example, and that’s also having a stabilizing effect on renewal prices,” he said.

The abundance of capital in the sector, he said, is expected to drive “a moderately softer and more competitive market in 2025”.

Providing a high-level view of reinsurance price changes made through 2024, referenced in various broker reports, Arrivé said property rates were steadily declining for non-loss business, rising only slightly for business with losses and by 10-15. crash percentage (with loss-affected accounts with prices at the upper end and non-loss accounts at the low end).

“Going forward, our base case for property-cat is for moderate and gradual softening. But rates should remain appropriate – and the tighter terms and conditions achieved last year should be maintained.

“Of course, reinsurers would like higher rates for longer, but we think they are more open to price negotiation than structure because maintaining current reinsurance structures is more meaningful to them than pricing in terms of profitability.”

Arrivé said it is Fitch’s view that the current favorable market conditions “will not end abruptly, even if the loss experience remains favorable for the remainder of the year.”

“That said, the market remains nervous and could strengthen again if there is a large industrial event in the second half of the year,” he said.

Coupled with lower property prices with expectations for casualty reinsurance rates – which vary by subline but are expected to rise for US casualty to keep pace with welfare inflation – Arrivé summarized the impact on profit margins.

“We expect underwriting margins to have peaked in 2023, 2024. And we expect market conditions next year to support strong yields even if prices fall again.”

While Fitch forecasts flat to declining margins in 2025, “we are still at very attractive combined rate levels of around 90 with stable investment income contributions. This would translate into a very strong sector return on equity of nearly 20%, which is in stark contrast to what we saw in the weak market years 2020, 2022 where ROEs were approx. 5%,” said Arrive.

While the report does not specifically mention whether the combined ratio forecasts include the impact of the update for reinsurers reporting under IFRS 17, the actual combined ratio figure of 87.3 includes the impact of the update, according to a Fitch report on mid-year reinsurance results published last week. .

Separately this week, Standard & Poor’s Global Ratings published a report with prior-year actual profit margins and forecasts based on a cohort of 19 global reinsurers – putting the undiscounted combined rate for 2023 at 91.5, and forecasts for 2024 and 2025 in the 92-96 range. While S&P maintains a stable outlook on the sector, S&P’s ROI forecast declines faster than Fitch’s – from 21.4% in 2023 to mid- to low-teens levels in 2024 and 2025.

Unlike S&P and Fitch, Moody’s Investors Service revised its outlook for the global reinsurance sector to positive from stable earlier this week. Structural changes in property reinsurance programs are among the key drivers of the change in outlook highlighted in Moody’s Outlook report. “Property reinsurers have increased the loss thresholds at which reinsurance coverage is triggered and reduced their exposure to high-frequency, low-to-moderate severity natural catastrophes such as severe convective storms.”

“Persistently high losses have led reinsurers to underwrite less of this risk, leaving primary insurers to bear a greater share of it,” Moody’s analysts wrote in the report. The report shows a side-by-side graphical comparison of the profitability of primary insurers and reinsurers, with the profitability of reinsurers nearly doubling the median return on equity for insurers in 2023 as primary players absorbed most of that year’s high-frequency weather losses.

According to the report, increased reinsurance premiums, favorable risk/return ratios and solid investment earnings also factored into the changing outlook.

“With limited new capital coming into the market, this will lead to continued strong profitability over the next year, assuming no major catastrophes,” Brandan Holmes, senior vice president and credit officer at Moody’s Ratings, said in a statement about changing perspective.

Rating agency AM Best also changed its rating outlook for the global reinsurance sector from stable in June to positive.

Related: AM Best Up raises the reinsurance outlook to positive

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