: Fitch Ratings says that earnings prospects for the global reinsurance industry remain uncertain, due to pressure on investment income, premium price adequacy and dwindling reserve surpluses. After unprecedented catastrophe losses in 2011, the agency expects earnings to gradually recover in 2012 if catastrophe losses normalise.
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. Reinsurers' resilience to this year's catastrophe losses reflects the sizeable capital buffers accumulated from earlier years of profitable business and effective use of retrocessional protection.
The most likely trigger for a Negative rating Outlook would be catastrophic losses that would erode over 10% of the reinsurance industry's capital together with an inability of reinsurers to replenish lost capital. Fitch estimates for that to occur, losses from a single event may need to exceed USD75bn and capital markets would need to lose confidence in the sector, at least temporarily. Such a combination would be rare.
Two or three years of material underwriting losses outside of normal cyclical variations, or severe dislocations in the capital markets impacting reinsurers financial flexibility over longer periods, could also result in a Negative Outlook. Moderate elevated catastrophe losses, or underwriting performance within normal cyclical variations, are typically not triggers for a Negative Outlook.
"Reinsurance pricing is at a crossroads, and an upturn in pricing is the factor most likely to improve the sector's medium-term earnings prospects," says Chris Waterman, head of EMEA Insurance ratings at Fitch. "Reinsurers' ability to raise prices into 2012 will mainly depend on the extent of catastrophe losses occurring during the remainder of the year. The recent downward revision of economic growth expectations by several major economies is expected to reduce demand for primary insurance and therefore makes it less likely that reinsurers will be able to raise rates."
"Fitch does not view Hurricane Irene as a market-changing event, but the storm adds to the unprecedented catastrophe losses incurred so far in 2011," says Martyn Street, Director in Fitch's Insurance team. "It is unclear whether insurers will achieve meaningful premium price increases outside loss-affected lines."
Fitch forecasts the global reinsurance industry's combined ratio (i.e. claims and expenses expressed as a percentage of net premium income) will deteriorate to 107.9% in 2011, from 94.7% at end-2010, based on Fitch's analysis of its monitored universe of reinsurance companies.
Fitch will publish a full report on the outlook for the global reinsurance industry in the coming days.
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