What’s behind Fitch’s upgrade of the global reinsurance sector?

Last week Fitch Ratings revised its outlook for the global reinsurance sector from ‘improving’ to ‘neutral’. So, what’s behind the upgrade?

In a reinsurance briefing on the ‘Global Economic Outlook 2025’ at RVS in Monte Carlo, director Manuel Arrivé (pictured left) said the ratings agency expects the sector’s trends and key credit drivers to remain broadly stable over the next 12 months. The sector, he said, has very strong capitalization and financial performance, by historical standards. And Fitch expects both balance sheet and profitability to remain resilient in 2025. However, “further improvements in fundamentals from this point are less likely.

“We believe the cycle has most likely passed its peak but the market conditions should remain broadly favorable and supportive of strong returns,” he said. “Yes, there are downside risks which remain elevated, but we think reinsurers are in a stronger position than last year to face any major shocks.”

What’s behind Fitch’s decision?

A combination of credit positive, credit neutral and credit negative factors have broadly offset each other to underscore the sector’s resilient profitability, according to Arrivé. On the positive side, Fitch expects disciplined markets with rates adequacy and strict terms & conditions holding firm despite increasing competitive pressures. “The sector enjoys a very strong capitalization that has further improved over the past 12-18, months, and reserves adequacy is also strong overall, with favorable developments in most business lines.”

Both capitalization and reserves buffers provide protection against unexpected earnings volatility, he said Meanwhile, investment income should continue to benefit from high reinvestment yields and revenue growth should continue to be steady, supported by increased demand in P&C, life & and health, and importantly, specialty lines.

On the neutral factors impacting the sector, Arrivé highlighted the fairly balanced dynamics between supply and demand. Capital has been growing faster than demand, he said, closing the gap in property capital, for example, and this has a stabilizing effect on prices. “Then you have macro factors first, economic growth, which is subdued but stable. That is still supportive of demand for primary insurers.”

On the interest rate environment, he noted that interest rates are neutral at this point, and Fitch believes companies will have reached most of the benefits of rising rates by the end of 2024 – with rates likely to decline from there. However, that decline should be gradual and moderate, and companies are well-prepared to mitigate the impact, especially on solvency. “Inflation continues to moderate, but the biggest unknown remains political and geopolitical risks.”

On the negative side, Arrivé noted that the market is moderately softening, with risk-adjusted prices declining from multi-year highs due to high competition, but mitigated by underwriting discipline. On the other hand, he said, claims costs continue to rise, and this is driven first by nat-cat – due to climate change – and US casualty – due to social inflation.

Reinsurance renewals – pricing versus structures negotiations

Turning his attention to renewals, he highlighted that, in January, there were only moderate price increases across most lines, which is a significant moderation from the large double-digit increases seen in 2023. The easing of prices then became more visible in April and July. The key takeaway from these renewal periods was that property rates were flat to modestly down for catastrophic loss-free businesses and only slightly up for loss businesses. In casualty lines, prices were in-line with previous renewals, with price increases of up to 50% for loss-hit accounts and up to 10% for loss-free lines.

“Looking forward, in property-cat, our base case is for moderate and gradual softening of prices. But rates should remain adequate, and importantly, the tighter terms and conditions that were agreed in 2023 should hold,” he said. “So, of course, reinsurers would like rates to stay higher for longer, but it looks like they’re more open to negotiation on prices rather than structures, because, at the moment, structures is moving for good profitability.

“We think the favorable market conditions are not going to end abruptly, even if loss experience remains benign for the rest of 2024. Having said that, the market remains nervous and any unexpected, large magnitude event happening during the second half of the year could prolong the hard market for longer. In casualty we think rates will continue to vary by certain lines, but focusing on US casualty, rate increases should keep pace with rising loss costs from social inflation.

Fitch’s forecast for 2024-2025

Offering his perspective on what the key takeaways from Fitch’s reinsurance forecast for 2024 and 2025 mean for reinsurers, senior director, Graham Coutts (pictured right) said the ratings agency expects to see premium growth continue, generally, but at single-digit levels. “We do think rate adequacy has been reached, but we do expect market discipline to continue. We expect reserve development to reduce, but to remain favorable, and the reduction is really driven by that adverse performance seen on the casualty side.”

Combined ratios remain strong, although perhaps marginally declining, he said, and ROE is extremely strong at about 20%. Coutts contrasted that with the last time he was at RVS in Monte Carlo where the conversation across the sector was around how soft the market was. That soft market was even in the context of following hurricanes Harvey and Maria where the market might have expected to see hardening, which didn’t happen. “So, it’s clearly a very different cycle.”