The soft pricing in the global reinsurance market will continue at least for the rest of the year, Fitch Ratings says.

Fitch expects premium rates to continue declining as a result of large amounts of under-deployed capital and sluggish demand from reinsurance buyers following several years of below-average catastrophe claims.

“Even if the cost of major losses returns to its historical average, prices are unlikely to rise materially given the abundance of capital in the sector,” said Fitch, noting that catastrophe losses rose in 2016 to their highest level since 2012 but were still only marginally above the 10-year (2006-2015) inflation-adjusted average of $53 billion.

As a result, reinsurance pricing is likely to remain challenging at the mid-year 2017 reinsurance renewals, said Fitch in its report titled “Global Reinsurers: 2017 Forecast and 2016 Results.”

The soft premium rates and low investment yields will take a toll on the sector and ultimately are expected to weaken profitability this year – factors that are reflected in Fitch’s negative outlook for the sector.

However, Fitch expects the global reinsurance sector to remain profitable this year, although Fitch forecasts the sector’s combined ratio to deteriorate to 92.0 percent in 2017 from 91.5 percent in 2016. (These are accident-year ratios excluding catastrophes.)

“We project retorn on equity (ROE) to decline to 7.6 percent in 2017 from 8.5 percent in 2016, with both underwriting and investment results under pressure,” Fitch says. “With an estimated 6 percent to 7 percent cost of capital, narrowing profit margins are a key concern for reinsurers.”

Despite these pressures, Fitch affirms that most reinsurers it rates have stable outlooks but less diversified, smaller reinsurers “face a greater risk of negative rating actions if prices drop much further, particularly as pricing has already fallen close to the cost of capital.”

Mergers and Acquisitions

Strong capital and lack of organic growth opportunities are likely to drive further share buy-backs, special dividends and M&A. Share repurchases increased in 2016, led by Swiss Re, which doubled its buy-backs to lead the sector, ahead of Munich Re and XL.

M&A activity is likely to continue in 2017 as companies contend with limited organic growth and seek enhanced scale and diversification, said the report.

Fitch noted that M&A is now more attractive as recent valuation multiples for deals dropped to the more reasonable range of 1.3 times-1.5 times book value from previous highs of near and above 2.0 times book value.

“Many of the recent notable deals involve entities seeking to deploy capital abroad,” by companies seeing to diversify and grow business outside their domestic market, the report continued.

The report cited the examples of the purchase of Bermuda-based Endurance Specialty Holdings by Japan’s Sompo Holdings for 1.4x book value in March 2017 as well as Canada-based Fairfax Financial Holdings’ planned purchase of Bermuda re/insurer Allied World for about 1.35x book value.

The report is available to download via Fitch’s website.

*This story appeared previously in our sister publication Insurance Journal.