Global reinsurers are expected to post modest underwriting profits in 2021, as increases in reinsurance rates across almost all business lines are expected to outpace loss cost inflation, says Fitch Ratings. Pandemic-related losses are projected to normalize across non-life (re)insurance, life and health reinsurance mortality businesses.
Fitch’s stable rating outlooks on global reinsurance and US property/casualty insurance reflect the expectation for hardening pricing conditions and stabilizing pandemic-related claims amid depressed investment income due to ultra-low interest rates and further asset quality deterioration.
The catastrophic events in 2021 have pushed prices even higher in an already hardening market. Premium pricing is expected to increase at the June and July 2021 reinsurance renewals, although likely losing momentum in 2022, following sizeable 2020 loss events that have continued in 2021.
Global reinsurance 1H21 earnings are expected to be pressured by year-to-date catastrophic events such as winter storms in the US and flooding in Australia. The recent Suez Canal blockage, while expected to result in large losses and in higher prices for marine reinsurance, is not likely to materially affect credit profiles.
Fitch forecasts a 2021 reinsurance combined ratio of 99.1%, reflecting 9.0pp average catastrophe losses, 1.5pp for additional coronavirus losses and 1.0pp of reserve releases, which are expected to diminish but remain slightly favorable to results. The reinsurance group underlying accident-year combined ratio, excluding catastrophes and coronavirus losses, is expected to improve to 89.6% in 2021, down from 90.5% in 2020 and 92.9% in 2019.
Reinvestment rates are expected to remain below running portfolio yields on reinsurers’ investment portfolios, with lower resulting investment income likely offsetting the modest increase in underwriting income in 2021. Investment income pressure may motivate reinsurers to maintain underwriting discipline and push up prices, however, these efforts may be thwarted by the competitive environment.
Global insurers entered 2021 very well capitalized, as underlying performance improved in 2020 due to significant price increases in non-life primary and reinsurance, despite substantial earnings pressure from pandemic-related paid claims and reserves. Capital levels remained largely intact despite substantial pandemic-related underwriting losses in several segments, including contingency/event cancellation, travel, trade credit and surety, business interruption, and mortality.
Fitch forecasts a 6.5% ROE in 2021, in line with the estimated 6%–7% cost of capital, as operating results remain stressed with record low investment yields. Shareholder equity growth has been driven by equity raised, unrealized bond gains from a decline in interest rates, and lower dividends and share repurchases as reinsurers retained capital, given pandemic-related uncertainty and in anticipation of favorable capital deployment opportunities.