The outlook for the global reinsurance sector remains stable with capital, underwriting and operating trends all expected to support its current strength over the next year or two, Fitch Ratings said today.
In a report on the sector's prospects in the near future, the agency said only the 'rare' combination of a catastrophic loss and reinsurers' being unable to replenish lost capital would threaten the industry's stable outlook.
Further growth in premiums and improvements in the sector's already-strong capitalisation are expected to continue into 2013 but Fitch did forecast that next year would see increased pressure on reinsurers' profitability.
Chris Waterman, managing director in Fitch's Europe, Middle East and Africa insurance rating group, said: 'While 2012 earnings are likely to improve, low investment yields and questions over the sustainability of prior-year reserve surpluses will make it more challenging for reinsurers to maintain profitability levels in 2013.'
Supply is expected to exceed demand across most reinsurance classes over the next 12 months, leading to a lower overall price increase on January 1 renewals, but Fitch said pricing would still be sufficient to support profitability across more classes of reinsurance.
Reinsurers will also remain cautious due to the high cost and difficulty of replacing lost capital, in particular in light of the high losses they suffered in 2011 and uncertainty over the global macroeconomic outlook.
In relation to the eurozone crisis, it claimed that reinsurers were more concerned by and exposed to the knock-on effects of any sovereign default, rather than the potential default itself. 'The agency continues to view the exposure held by European reinsurers to peripheral eurozone countries' sovereign and bank debt as manageable, having stress-tested the investment portfolios of its rated universe of European insurers and reinsurers,' it said.
During 2013, Fitch expects low investment yields and falling contributions from surpluses saved in previous years to make it harder for reinsurers to achieve a level of profitability similar to that forecast for this year.
However, for Fitch to revise the sector's outlook would require a single loss event of $60bn - higher than its previous estimate of $50bn. This increase reflects the strengthening of the sector's capitalisation, it explained.
Martyn Street, director in Fitch's EMEA rating group, said: 'A further catastrophic loss coupled with an inability for reinsurers to replenish lost capital is the most likely threat to the sector's stable outlook at this time. Historically, this has been a rare combination.'
