Key challenges facing global reinsurers will drive profits lower, but are unlikely to undermine the current strong levels of capitalization for the majority of carriers over the next 12-to-24 months–subject to normal catastrophe experience, according to Fitch Ratings.

Fitch added that its rating outlook for the global reinsurance industry remains “stable,” based on an expectation that profitability will decline in the sector over the next couple of years–driven by lower levels of underwriting profit, investment income and prior-year reserve releases.

“The relative attractiveness of the reinsurance operating environment has resulted in an intensification of competitive conditions, and prospects for continued strong earnings have diminished for many global reinsurers,” Chris Waterman, managing director in Fitch Ratings' Insurance group in London, said in a statement.

“Fitch considers that the next 12-to-24 months will prove to be a period of notable differentiation between companies,” he added.

Fitch observed that pressures are beginning to mount as premium rates edge lower.

There is reduced demand for reinsurance capacity among cedants, and reinsurers face continuing challenges in generating sustainable levels of investment income in the current low-interest rate environment, Fitch observed in a release issued ahead of next week's annual Reinsurance Rendezvous in Monte Carlo.

Reinsurers also are contending with a variety of complex regulatory issues, including the introduction of Solvency II regulations for the European Union, which require adaptation to a modified competitive landscape once the new rules are implanted at the end of 2012.

However, Fitch said these challenges, although significant, are manageable for most reinsurers and remain within normal cyclical expectations.

Many of the traditional drivers of reinsurers' historical profitability–such as investment income and the release of prior-year reserves–are unlikely to support earnings over the near-term, according to Fitch, which views underwriting discipline and proactive cycle management as critical to reinsurers' future profitability.

Additionally, Fitch said the ability of reinsurers to successfully execute on cycle management strategies will vary significantly across the sector.

Despite the challenges, Fitch said the global reinsurance sector proved very resilient through the course of the financial crisis, due in large part to its high asset quality, strong capital base going into the crisis and disciplined underwriting.

Additionally, Fitch said underwriting earnings in 2009 were strong for many reinsurers–even against the backdrop of a benign catastrophe environment–while noting that the ability of reinsurers to access capital markets to replenish depleted capital bases should a major catastrophe occur has returned to “more normal levels” compared to the height of the financial crisis.

Reinsurers that are successful going forward, Fitch predicted, will be defined by their ability to manage their underwriting exposures by exiting or cutting back on lines of business that are no longer technically profitable.

Sovereign debt markets remain a key area of uncertainty and volatility, Fitch said, with the European debt crisis taking a toll on consumer confidence and unsettling capital markets. This has led to an elevated risk of European countries falling into a double-dip recession, Fitch noted.

Special Reports /

Global Reinsurers Face Shrinking Profits, But Capitalization To Keep Sector Stable

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