S&P still negative on reinsurance sector, rates keep rising

S&P Global Ratings says its view of the reinsurance sector remains negative amid impacts from natural catastrophes, markets volatility and inflation although it expects property and casualty profitability will improve.

Reinsurers will continue to struggle to sustainably earn in excess of their cost of capital due to potential heightened natural catastrophe losses, capital market impacts and high inflation, it says in a report titled Is the Global Reinsurance Sector About to Turn a Corner.

“On the bright side, reinsurance pricing is improving with the expectation that it will carry on into 2023 renewals, and new underwriting opportunities could be the lifebuoy needed for the sector to regain its footing and begin to earn its cost of capital once again,” S&P says.

As of the end of last month, S&P says 19% of ratings on the top 21 global reinsurers it rates were on CreditWatch with negative implications or had negative outlooks, 76% were assigned stable outlooks, and 5% were on CreditWatch positive.

Reinsurer strategies toward natural catastrophe risk have diverged, with half of the top 21 growing their net exposure and some existing altogether, and the remainder taking a more cautious and defensive stance.

At the same time demand for property catastrophe cover is rising, helping to support rate increases into next year.

“As we are still in the midst of the Atlantic hurricane season, which typically shapes the year’s performance, outsize catastrophe events during the season could call into question the strategy of those reinsurers that have maintained or increased exposure to natural catastrophes,” S&P says.

Broker Gallagher Re in a half year report on the sector says reinsurers have together achieved premium growth of 14% in the period supported by pricing moves.

Investment losses caused a decline in reported return on equity (ROE) to 0.4%, while underlying ROE rose to 7.5% in the first half from 6.3% a year earlier. That’s the best performance since 2014, but still below the industry’s weighted average cost of capital, Gallagher Re says.

Total capital dedicated to the global reinsurance industry declined 11% at the half year to $US647 billion ($945 billion), mainly due to accounting mark-to-market investment losses.

“Investment losses have hurt what was otherwise a more positive first half for reinsurers, and the steep headline decline in capital overstates the impact on economic capital positions,” Gallagher Re CEO James Kent said.

“But the figures nonetheless show the need for continued vigilance given today’s macroeconomic and geopolitical uncertainties and the continuing debate over natural catastrophe exposures.”

Marsh McLennan reinsurance broker Guy Carpenter said at a recent virtual media briefing that insurers and reinsurers are both being strategic about business they are taking on and are carefully evaluating risks.

“Demand for reinsurance is expected to remain strong as risk awareness and desire for downside protection is pervasive across the industry in this uncertain environment,” Chairman David Priebe said.

“Overall, this is one of the most challenging and complex markets seen in years and January 1 will likely follow the wide range of renewal outcomes achieved at mid-year.”