As all eyes turn to the Monte Carlo Rendezvous Fitch Ratings released its 2010/11 Reinsurance Review and Outlook, predicting a period of ratings stability for the sector.
Fitch cited the resilience shown in the reinsurance sector during the financial crisis as a primary reason for the forecast allied to strong levels of capitalisation and the ability to access capital markets returning to pre-financial crisis levels. Profitable underwriting was also a factor with approximately 70 reinsurers in the Fitch rated universe demonstrating sub 100% combined ratios in 2008 and 2009. Despite deterioration in underwriting performance in the first half of 2010 due to high catastrophe losses, Fitch said it expected 2010 underwriting results to be profitable, subject to no major catastrophe losses in the second half of the year.
Chris Waterman, Managing Director of Fitch Ratings’ Insurance Group in London said: “The relative attractiveness of the reinsurance operating environment has resulted in an intensification of competitive conditions, and prospects for continued strong earnings have diminished for many globalreinsurers”.
Pressure is expected to increase on earnings, owing to a softening of premium rates and low interest rates generating low returns, Mr Waterman added. With growing concerns over a double-dip recession and the introduction of Solvency II to an already competitive landscape, reinsurersface a range of fundamental challenges.
Fitch believes that historic drivers of reinsurer’ profitability such as investment income and the release of prior-year reserves, are unlikely to enable reinsurer’ to generate sustainable levels of income in the short-term. It believes that the winners and losers in the reinsurance industry over the months to come will be determined by disciplined underwriting and proactive cycle management, attributes it believes are critical if reinsurers are to claim profits on their existing earnings. However, Fitch reinforced that the most predominant rating action is likely to be that of affirmation.
Mr Waterman concluded, “Fitch considers that the next 12-24 months will prove to be a period of notable differentiation between companies”. He added that it will become clear which firms have been able to manage their capital and underwriting strategies the better.