Fitch’s Reinsurance Outlook Remains Negative, Despite Entry into Hard Market Phase

By Adrian Leonard | September 11, 2020

Fitch Ratings said yesterday its ratings outlook for companies in the global reinsurance sector will continue to remain negative as a result of hefty coronavirus claims and low interest rates.

The good news for companies, however, is that the market has entered a hard phase, and COVID claims are likely to remain manageable.

“Including coronavirus pandemic claims, we have already seen a claims level that reaches the amount of full year 2019,” said Robert Mazzuoli, Fitch’s director of Insurance Ratings, during the agency’s global reinsurance outlook media briefing.

With roughly $20-25 billion of pandemic-related claims already on insurers’ books, and industry estimates putting the total at roughly double that, “you can imagine that there is more to come,” Mazzuoli said. “The hurricane season is not over… and social inflation is not off the agenda yet, in particular in the U.S. In the end, 2020 could become one of the costlier years for the reinsurance industry.”

‘Hard to Compensate’

The second main factor driving Fitch’s negative sector outlook is interest rates, which moved sharply lower after lockdowns around the world and second-quarter economic recession. “This is certainly a negative for the reinsurance sector,” Mazzuoli said. “It means that investment yields are way below the current yields on existing portfolios… It is hard to compensate on the underwriting side. The industry must try hard to do so, but it is not an easy game.”

On the positive side, reinsurers are beginning to make necessary changes to their underwriting practices. “Prices are probably the biggest positive we are observing,” according to Mazzuoli. “For example, the property cat rate-on-line index hints that rates barely moved until 2019, despite [loss events] that really struck [reinsurers] hard in 2017.”

The impact of these catastrophe events on prices was limited, and largely confined to loss-affected lines of business and regions, he said.

“This year things are changing,” Mazzuoli reported. “We have seen an acceleration in price improvements since the January 2020 renewals.” The picture was varied before the onset of COVID-19, when loss-free programs still saw moderate declines upon renewal, and most loss-affected lines drew price rises, “but it was not a unanimous picture that we could detect,” Mazzuoli said.

However, the picture changed during mid-year renewals, especially at June-July. Price declines have all but ceased, and instead, “we see price improvements in almost all major lines of business, including those where we haven’t seen big claims development,” Mazzuoli said.

‘Hard Market Phase’

The analyst went on to scrutinize the performance of the four major European reinsurers: Munich Re, Swiss Re, Hannover Re, and SCOR. Their experience this year reveals the market’s pricing improvements, he said. “In 2020, on average, we have seen the best picture of the past five years, across the board for all four reinsurers, no matter what their business composition looks like. That indicates we have entered into a hard market phase.”

Mazzuoli identified this trend in the four companies’ underwriting results. “We see a stark contrast between what happened in 2019, and the first half of 2020.” Last year’s normalized combined ratios (which remove the impact of reserve adjustments and excess impacts of abnormal catastrophes and other large losses) were “still relatively high,” Mazzuoli said. “That means their underlying profitability was still unsatisfactory, with combined ratios very close to the 100% threshold.”

That picture has also changed this year. “Their normalized underlying combined ratio has improved… This is the first signal that the onset of the hardening market is being felt, and can be seen slowly in the results that are reported,” he added.

Meanwhile, although COVID-19 has “taken its toll” on the solvency ratios of all four reinsurers, Mazzuoli said the ratios have remained above their risk-appetite thresholds. “We still see levels that are very strong and are testament to the risk management and balance sheet strength of the four major reinsurers in Europe.”

Bermuda on Trend

Looking to the Bermuda, Brian C. Schneider, senior director and global head of Reinsurance at Fitch, said the market there has also been improving. Bermuda insurers’ and reinsurers’ 2019 underwriting profit was “slight,” but improved over 2018, he said. “Catastrophe losses added a reduced 6.1 points to the combined ratio in 2019, compared to the 10.5 points in 2018.”

Headline performance deteriorated during the first half of 2020 to an underwriting loss arising from a 101.2% calendar-year combined ratio, including 9.2 points of non-life pandemic-related losses. Reinsurance operations were hit harder than insurance books, recording 10.8 and 8.2 points of COVID-19 losses respectively.

However, like the four major European reinsurers, Bermuda companies’ underlying performance was better than in 2019. “Looking at the underlying accident year combined ratios, excluding catastrophe and coronavirus losses, results improved to a 90% combined ratio in first-half 2020, down from 92% in 2019,” Schneider said. “This reflects the improved reinsurance market conditions.”

Net income return and, therefore, return on equity remains pressured, however. First-half RoE reached only 1.7% for Bermuda re/insurers, reflecting actual rather than adjusted loss ratios, and the difficult investment climate.

The risk classes worst hit by COVID-19 in Bermuda have been event cancellation, business interruption, and trade credit, Schneider said. “Liability losses have been more limited thus far, but could potentially add significant claims, to the extent that businesses do not receive safe-harbor liability protection related to the coronavirus.”

Reserves Exhausted

After 16 consecutive years of overall reserve releases, Bermuda reinsurers have “essentially exhausted their reserve redundancies,” he said. “More recent accident years have turned deficient. For the first six months of 2020, reserve development was slightly adverse, at 0.2% of earned premiums.”

Bermuda re/insurers’ prior-year reserve development was negatively affected during H1 by increases in casualty claims, severity deterioration, rising social inflation, and continued reserve additions for earlier catastrophe losses, Schneider reported.

But solid growth continues across Bermuda’s insurance and reinsurance market, reflecting premium rate increases and hardening market opportunities. Reinsurance has increased its share of Bermuda’s net premium take to 64% in 2019.

‘Slightly Profitable’

Overall, Fitch expects reinsurers to be “slightly profitable” in 2020, Mazzuoli said, and total COVID-19 claims to “remain manageable” for the industry as a whole.

“It’s nothing to get excited about,” he said. “We expect very-low-single-digit RoEs, and going into 2021, returns slightly below the cost of capital.”

Related:

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About Adrian Leonard

Dr. Adrian Leonard is a longstanding commentator on the international insurance sector, and an academic historian of marine insurance.

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