Executive preview:
We have changed our outlook on the global reinsurance sector to stable from positive. Pricing for property reinsurance is declining as the supply/demand balance shifts toward reinsurance buyers. Capacity in the traditional market is plentiful and capital inflows to the alternative markets, particularly catastrophe bonds, are also pushing prices lower. Nonetheless, risk-adjusted returns in property reinsurance remain attractive and we expect profitability to be strong over the next year. Casualty reinsurance prices continue to rise, though the adequacy of US casualty loss reserves remains a risk, as higher claims from increased litigation and settlement costs have led to significant adverse loss reserve development across the sector. However, solid balance sheets and strong investment income will help reinsurers manage the volatility arising from catastrophe losses and the uncertainty associated with reserve adequacy in US casualty lines.
- Profitability to benefit from strong underwriting and investment returns. Risk-adjusted returns remain attractive for reinsurers, but will likely be lower than last year. Assuming average global insured catastrophe losses, we expect good underwriting results and solid investment income to support strong profitability metrics for the reinsurance sector.
- Lower property reinsurance pricing as competition rises; terms and conditions ease. Rate increases and structural changes instituted by reinsurers – such as raising attachment points – have resulted in significantly better profitability over the past couple of years even as global insured catastrophe losses have been elevated. Although attachment points are generally holding steady, we are seeing some signs of easing terms and conditions. We think property cat pricing will continue to drift lower absent a market-changing loss event.
- Casualty reinsurance pricing continues to move higher; reserve volatility a risk. Social inflation — the rising cost of insurance claims as a result of societal and legal trends — will continue to drive adverse reserve development for certain US casualty lines. Reinsurers have been able to offset some of the adverse development with favorable reserve development on short-tail lines.
- Solid balance sheets underpin credit profiles. Reinsurers' strong balance sheets bolster their ability to grow opportunistically in well priced lines and provide a buffer against risks from severe catastrophe losses or significant loss reserve strengthening. As pricing in certain reinsurance lines becomes less attractive, we expect companies to return excess capital to shareholders through dividends and stock buybacks.