Fitch Ratings says that some reinsurers are more exposed to further major catastrophe losses during 2012, according to a new report published this week.
While the overall level of capitalisation for Fitch's monitored universe of reinsurers grew by 3.4% at year-end 2011, 15 of the 24 reinsurers reported lower shareholders' equity, having been financially weakened by a near record level of insured catastrophe losses that occurred in 2011.
The rating outlook for the global reinsurance sector remains stable, due to the industry's capital strength and projected underwriting and operating trends, which Fitch expects to support reinsurers' current ratings over the next 12-24 months. Despite the observed reduction in some reinsurers' capitalisation, the sector has generally been resilient to 2011 catastrophe losses.
The agency has revised its trigger for a negative sector rating outlook, lowering the value of the size of single-loss event to in excess of $50bn from $75bn, resulting in a material loss of capital that the sector was then unable to replenish. One or two years of material underwriting losses or a severe dislocation in financial markets, preventing reinsurers from replenishing balance sheets in case of catastrophe losses would also result in a negative outlook.
Positively, Fitch anticipates a marked rise in reinsurers' 2012 earnings, driven by a lower catastrophe burden and improving pricing conditions. "Net written premium (NWP) growth expected in 2012 reflects pricing movements and increased purchase of certain reinsurance protection by cedents, due to recent catastrophe model revisions and in the wake of 2011 catastrophe losses," says Brian Schneider, senior director in Fitch's Insurance Team. "Growth will be marginally offset by a reduced level of reinstatement premiums, reflecting an anticipated reduction in catastrophe activity during 2012."
"Fitch continues to view the direction of pricing over the next 12-18 months as the key determinant of earnings performance through the rating period," says Martyn Street, director in Fitch's Insurance team. "While pricing fundamentals are generally better, the high single-digit rate increases anticipated by many insurers across their portfolios did not materialise in the key opening months of 2012. This could make it harder for reinsurers to earn back losses incurred in 2011."
Fitch forecasts the global reinsurance industry's combined ratio will improve to 95.8 in 2012, from 109.1 at end-2011, based on Fitch's analysis of its monitored universe of reinsurance companies.
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