LONDON (Dow Jones)--Reinsurance company earnings may come under pressure in
the next one or two years as increased competition in the sector drives down the
amount they can charge their insurance company clients for cover, and as weaker
financial markets make it harder for them to boost investment returns, ratings
agency Fitch Ratings said Wednesday.
Reinsurers came through the financial crisis in good shape after having raised
rates in recent years in response to events like the September 2001 terrorist
attacks in the U.S., Hurricane Katrina in 2005 and the recent financial crisis.
Typically, reinsurers as well as insurers, increase their rates to remain
profitable after major insured events, such as disasters and natural
catastrophes. But despite a record level of claims in the first half of last
year, Fitch says the rate trend over the next couple of years will be generally
downward.
"Pressures are beginning to mount as premium rates edge lower. There is
reduced demand for reinsurance capacity among cedants (reinsurance clients), and
reinsurers face continuing challenges in generating sustainable levels of
investment income in the current low interest rate environment," said Fitch
Managing Director Chris Waterman.
In a report, Fitch estimates that global reinsurers have insured losses worth
$15.39 billion in the first half of this year, the highest half-year figure on
record.
Those losses relate to natural catastrophes, including the Chilean earthquake
early this year, the winter storm Xynthia in Europe, the hailstorms in the U.S.
and Australia and an earthquake in Mexico in April.
Still, the $15.39 billion figure is significantly lower than the $330 billion
worth of capital held by more than 70 of the world's top reinsurers.
This figure is even higher than their capital level before the financial
crisis. In 2006, for example, their capital was just below $280 billion. During
the financial crisis in 2008, that had fallen to just above $240 billion.
Waterman said it would take at least $30 billion to $40 billion in insured
losses for the reinsurance industry to raise premium rates, a prospect which
currently looks unlikely.
He said Fitch is keeping its stable outlook on the reinsurance industry, which
means more companies are likely to have their ratings affirmed though some may
still have upgrades or downgrades.
Fitch changed its outlook to stable from negative in November last year as it
saw that reinsurers were resilient through the financial crisis.
He said reinsurers are up for some intense competition as they try to increase
earnings from core operations and contend with lower investment income due to
the current low interest rate environment.
Waterman said reinsurers should have "more discipline" in their business,
which means keeping margins steady and exiting from businesses which are less
profitable and writing more business with better margins.
He also said merger activity among reinsurers will remain limited due to
uncertainties surrounding the Solvency II capital-requirement regime set to be
implemented across Europe in 2012. Also, the depressed share prices of acquiring
companies has made it less easy to raise funds in capital markets to acquire
other companies.
-By Vladimir Guevarra, Dow Jones Newswires; +44 (0) 2078429486,
vladimir.guevarra@dowjones.com
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(END) Dow Jones Newswires
09-01-10 0817ET
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