In a report published Tuesday, Fitch Ratings forecasted that sharp reinsurance price hikes achieved during Jan. 1 renewals will improve underwriting margins for its rated global reinsurance universe by around 4 percentage points.

The price increases, including 20-60 percent jumps reported for property reinsurance, will also give reinsurers flexibility to turn over investment portfolios to take advantage of higher interest rates.

“Better underwriting margins should also provide some wiggle room for dealing with the large amount of unrealized losses on the reinsurers’ bond portfolios. Accelerating the turnover of fixed-income portfolios would allow reinsurers to benefit from higher reinvestment yields more quickly, while the realized investment losses would then be absorbed by higher technical profits,” the report noted.

In 2022, a steep rise in interest rates forced reinsurers to mark down large parts of their bond portfolios, and Fitch estimates that this caused accounting capital to shrink by around 15 percent (due to the accounting mismatch between assets and liabilities in many jurisdictions). The rating agency report explains, however, that higher interest rates had a neutral to positive impact on “economic [risk] and regulatory capital.”

“[W]e do not consider the industry’s capitalization to have suffered materially,” the report says, also noting that new capital did not flow in from either traditional reinsurers or alternative capital providers.

Fitch believes that the drop in accounting capital likely bolstered reinsurers’ underwriting discipline at January 1 despite higher interest rates, reasoning that “important stakeholders, such as investors, may still assess the loss in accounting capital negatively.”

While alternative capital inflows in 2022 remained below the levels seen in the previous two years, Fitch anticipates that the situation will change—and that these inflows will accelerate in 2023 as trading conditions and expected returns improve.

Fitch maintains its neutral sector outlook for the global reinsurance sector. The view weighs stronger underwriting margins to be achieved on the back of more favorable pricing and terms against negative factors like continuing macroeconomic and geopolitical uncertainties, high claims inflation, as well as rising natural catastrophe claims driven by climate change.

Property reinsurance wasn’t the only segment of the market that saw strong 1/1 pricing. Fitch reported that prices jumped 30-60 percent for specialty lines, such as aerospace and political risks (including civil unrest and war) for loss-free programs. Price increases of 50-200 percent were reported for loss-impacted programs in these lines, with the war in Ukraine serving as the trigger for the jumps.