Fitch Ratings' rating outlook on the global reinsurance sector remains stable. The agency believes that individual companies' operating performance, capitalisation, and anticipated market conditions, despite their deterioration over the past year, will continue to support current ratings over the next 12-18 months.
Fitch believes that the non-life reinsurance sector will generate an underwriting profit in 2008, assuming "normal" catastrophe-related losses. Non-life reinsurers have generally maintained underwriting discipline. Given pressures such as declining investment income and capital flows out of the sector, Fitch believes this discipline is likely to be maintained over the next 12-18 months.
"While underwriting margins are likely to continue to erode over the near-term, unless there is a major catastrophe event, the sector will continue to generate reasonable returns on capital," says Mark E. Rouck, Senior Director in Fitch's Insurance rating group. "Fitch does not see a 'tipping point' in the foreseeable future at which reinsurers' operating performance and market conditions no longer support a Stable rating Outlook."
For life reinsurers, Fitch believes that market conditions and individual companies' performances will remain largely unchanged over the near-term. The agency has heightened concerns about life reinsurers' asset quality in the face of deteriorating credit and financial market conditions but these concerns do not appear significant enough to affect the rating outlook.
Nevertheless, market conditions in both life and non-life reinsurance are closer to those that would cause Fitch to revise its rating outlook to negative than they were at this time in 2007.
"The reinsurance sector is not emerging from the last twelve months completely unscathed," says David Stephenson, director in Fitch's Insurance Rating Group. "Underwriting and investment conditions are clearly less favourable than they were a year ago, and capital cushions have been partially eroded. While Fitch does not expect the cyclical deterioration in market conditions to be deep or prolonged enough to change its Rating Outlook to Negative, the deterioration is closer to such conditions than it was a year ago."
For non-life reinsurers, conditions that could push the outlook to negative include deep and prolonged soft market conditions, especially if coupled with investment market or "shock" catastrophe-related losses.
While the agency does not believe that projected market conditions over the next 12-18 months constitute a "deep and prolonged" soft market they are closer to such conditions than they were a year ago.
For life reinsurers, the outlook could change to negative if widespread declines in asset-quality or fundamental changes in factors affecting product demand, such as a significant change in regulatory reserving requirements or a dramatic increase in the use of substitute products, were expected.
Although the agency does not believe that asset-quality will deteriorate to the point that it affects the rating outlook, asset-quality in the first half of 2008 has deteriorated.