Fitch: The "Big Four" European reinsurers resist pricing competition
The recent Fitch's "European Reinsurance Peer Review" report compares and contrasts the key credit factors affecting the ratings of the 4 major European reinsurers. According to its findings, the four largest European reinsurers have been able to largely maintain their pricing and policy terms to protect earnings without a significant fall in business volumes, helped by their strong market positions. They all reported strong property and casualty (P&C) underwriting results in 2016, albeit helped by prior-year reserve releases and lower-than-expected major losses, which cannot be counted on to continue.
Most of their operating profit comes from P&C reinsurance but we expect a growing contribution from life reinsurance, driven partly by life insurers seeking to transfer longevity risk in response to higher regulatory capital requirements from the introduction of Solvency II. SCOR in particular is building its life reinsurance business following two major acquisitions in recent years.
All four companies have maintained very strong capitalisation in recent years, which is important for their ratings. They all score "Very Strong" or "Extremely Strong" in Fitch's Prism factor-based capital model. Their financial leverage ratios (FLRs) are low compared with most primary insurers in Europe and likely to remain so while the competitive market limits opportunities for growth. Munich Re's Fitch-calculated FLR is the lowest of the four: 13% at end-2016, and now materially lower following repayment of EUR1.5 billion of subordinated debt, which reduced the Fitch-calculated FLR by 3.8 percentage points.
Pricing in the wider reinsurance market is under intense pressure following several years of below-average major losses and an influx of capital to the sector as investors look for higher returns than they can get from investment markets. The Fitch-calculated combined ratio, excluding the impact of prior-year reserve releases and lower-than-expected major losses, was nearly 100% in aggregate in 2016 even for the four major European reinsurers, indicating underwriting profit little better than break-even. Our fundamental outlook for the reinsurance sector is negative and we expect profitability to weaken as pricing and investment yields continue to decline.
The latest issue of the Fitch European Reinsurance Peer Review is available here.
In key financial metric terms, the four big reinsurers analyzed by Fitch are holding together an assets volume of almost EUR 590 billion and have written in 2016 premiums worth EUR 114.7 billion.
Fitch Ratings says in its new report that all four of the major European reinsurers reported lower-than-expected large loss experience in 1H17, which helped them to maintain underwriting profitability. However, on a normalised basis, adjusting for variances from budgeted totals for major losses and prior year reserve development, the combined ratio for both Munich Reinsurance Company (Munich Re) and Hannover Rueck SE (Hannover Re) was above 100% in 1H17, indicating that had major loss experience and reserve development been in line with expectations, these insurers would have made underwriting losses.
Overall, their return on investments continued to decline, with three of the four major European reinsurers reporting a modest decline in investment income. Hannover Re reported higher investment income, despite a lower yielding fixed income portfolio, driven by income from private equity and real estate funds. The short-duration investment portfolios of reinsurers further expose them to the diminishing rate of return upon reinvestment.
The major European reinsurers hold very strong levels of risk-adjusted capital based on both Fitch's Prism Factor Based Model assessment and their regulatory-assessed solvency coverage. All four reported regulatory ratios in excess of the lower end of their target ranges and well in excess of the regulatory minimum.
Munich Re and Swiss Reinsurance Company Limited (Swiss Re) reported a reduction in P&C reinsurance gross premiums written, due to the targeted withdrawal from unprofitable lines of business. Conversely Hannover Re and SCOR SE (SCOR) both reported growth, of 16.9% and 10.6% respectively, at constant exchange rates. Hannover Re reported increased demand for structured reinsurance solutions, which more than offset premium declines in other areas, whereas SCOR benefitted from the impact of large contracts written in the US during 2H16.
Throughout 1H17, portfolio level rate reductions have been smaller than in 2016 for each of the major European reinsurers, but pricing remains under pressure. Record growth of catastrophe bond issuance and collateralised reinsurance is putting a further strain on pricing, especially in relation to US natural catastrophe exposed lines.