Amid the downward trend in investment yields and pricing, Fitch Ratings is forecasting weakened profitability in Europe’s reinsurance sector. The credit rating agency’s fundamental outlook for the sector is negative.
However, according to Fitch, the four biggest European reinsurers have been able to largely maintain their pricing and policy terms to protect earnings without a significant fall in business volumes.
“Pricing discipline by
Munich Re,
Swiss Re, Hannover Re, and
SCOR is proving an important competitive advantage in the face of declining market pricing and investment yields,” it said.
The abovementioned firms – whose operating profit mostly comes from property and casualty (P&C) reinsurance – reported strong 2016 P&C underwriting results, “albeit helped by prior-year reserve releases and lower-than-expected major losses,” which are not expected to continue.
Meanwhile, life reinsurance’s contribution to operating profit is likely to grow, partly because of life insurers transferring longevity risk amid higher regulatory capital requirements. SCOR, for instance, has had two major acquisitions in this regard.
In terms of capitalisation, the credit rating agency said the four reinsurers all score “very strong” or “extremely strong” in Fitch’s Prism factor-based capital model. “Their financial leverage ratios (FLRs) are low compared with most primary insurers in Europe and likely to remain so while the competitive market limits opportunities for growth,” it said.
It added that Munich Re’s Fitch-calculated FLR is the lowest of the four: 13% at the end of last year, and now down by 3.8 percentage points after the company repaid €1.5 billion of subordinated debt.
“Pricing in the wider reinsurance market is under intense pressure following several years of below-average major losses and an influx of capital to the sector as investors look for higher returns than they can get from investment markets,” said Fitch.
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