S&P improves global reinsurance sector outlook to stable

S&P Global Ratings has revised its outlook for the global reinsurance sector to stable from negative, amid expectations that carriers will earn their cost of capital in 2023-2024 based on favourable P&C reinsurance pricing conditions.

The rating agency had held a negative view of the sector since May 2020 following the immediate impacts of the Covid-19 pandemic.

Speaking at a media briefing ahead of next week’s Rendez-Vous in Monte Carlo, Ali Karakuyu, director and lead analyst, insurance ratings at S&P, explained that the structural changes to reinsurance underwriting seen during the 2023 renewals are anticipated to provide a “long-lasting” tailwind for the sector.

With the hard market in short-tail lines and tighter terms and conditions handing pricing power back to reinsurers, other green shoots observed in the sector include higher attachment points, fewer aggregate covers and stronger investment income.

“We expect rate rises to continue this year and next year, as reinsurers will hold off their guards in defending the harder pricing increases that they have achieved. Reflecting on that, we have revised our outlook for the reinsurance sector from negative to stable,” said Karakuyu.

“By extension, what that means is that the pressure points we were seeing, we expect to be alleviated, and we expect reinsurers to earn their cost of capital, both this year and next year.”

In addition to increasing rates, reinsurers have also pushed primary companies to retain more on their own balance sheets.

“With the Russia-Ukraine conflict not ending up a big event – so far at least – reinsurers have had many reasons to go to the discussion table with primary markets to justify the continuation of the rate rises, or at least holding on to the hardened rate rises that they have achieved,” Karakuyu explained.

“In general on the pricing, we expect the sector to, at a minimum, defend the rate rises they have achieved, or even push more rate increases in 2024.”

Operating performance: sector CR forecast of 92-96% for 2023 and 2024

The stable view reflects the rating agency’s expectation of credit trends over the next 12 months, including the distribution of rating outlooks.

As of 28 August, 90 percent of the top 20 global reinsurers were assigned stable rating outlooks, with positive and negative both at 5 percent.

In terms of operating performance, S&P forecasts a net combined ratio for the global reinsurance sector between 92 percent and 96 percent at the end of 2023 and 2024. This marks an improvement on the 96 percent posted in 2022, itself a gain on the five-year average of 99.7 percent.

The impact of nat cat losses on the combined ratio is expected to be between 8 and 10 percentage points, in line with the 9.2 point impact recorded across the global reinsurance cohort in 2022.

“We expect better levels, even better than 2022, for this year and next year,” said Karakuyu.

The stronger results and improved sector outlook is reflected in credit ratings for key players in the sector. Last month, Munich Re’s outlook was raised to positive from stable, while Swiss Re was revised to stable from negative.

“That's the tangible demonstration of how we're seeing that positivity manifested,” commented Simon Ashworth, head of analytics and research, insurance at S&P.

“We’ve seen the positive or negative outlooks being much more issuer-specific and idiosyncratic, potentially M&A-related or transactional, whereas before it was a bit more industry-wide.”

Appetite for alternative capital driving retro price increases

With total year-to-date cat bond issuance exceeding $8.6bn, 2023 looks set to be another record year for alternative capital.

“Going into the hard market area as one expected in 2023, investors were quite aware of the fact that the rate rises that were taking place in recent times were really needed, as opposed to a sudden big capacity shortage, which meant that you can come in and have a high return on capital,” Karakuyu explained.

“Keep in mind that when investors are deciding to put money into the sector, they're also weighing it against what else is out there.”

The analysts added that it is still too early to determine the impact on the sector from the recent Vesttoo scandal concerning allegedly fraudulent letters of credit.

While still in the fact-finding stage, the analysts added that the situation marks a “good test for the market” in terms of the principles that lie behind reinsurance transactions, and will hopefully strengthen appetite for alternative capital.

The already-observed uptick in appetite for alternative capital is a result of the diversification benefits from an investment perspective.

Karakuyu added that the increase in alternative capital may have contributed in part to increases seen in retro pricing, which has led some companies to find it “quite challenging” to find retro capacity.

“The increase in retro pricing is a combination of both the appetite for alternative capital and the behaviour of reinsurers to the primary companies – that behaviour and the rationale replicates itself on the retro side as well,” Karakuyu said.

He concluded: “By way of numbers, [the hard market] already has made a difference, and it will continue to be so at least in 2023 and 2024.

“The interesting point about that is, as we've seen in the past, reinsurers have become victims of their own success, because as the results get better, the story will change in terms of new capital providers coming into the area. Another two years, will that maybe change the behaviour of potential investors and place pressure on the rates again? That remains to be seen, but it does happen, and it has happened.”