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Reinsurance companies have reaped substantial investment income benefits from rising investment yields in the past 2.5 years, said a new report from rating agency Fitch Ratings, in its new report for the Rendez-Vous de Septembre in Monte Carlo.
"Profitability should remain very strong by historical standards in 2025."
However, overall, things were less comfortable - Fitch said it had revised its global reinsurance sector outlook to ‘neutral’ from ‘improving’ as the “pricing cycle has most likely passed its peak”.
“Nevertheless, profitability should remain very strong by historical standards in 2025,” it said.
The reinsurance sector saw record profits in 2023 and in H1 2024 from the “best underwriting conditions in over 20 years”, steady investment income, enhanced balance-sheet resilience through rising capitalisation buffers and strengthened reserve adequacy provide a strong base, the report said, which has meant the sector has been able to withstand potential pressure from prices declining from multi-year highs, rising claims cost, and high catastrophe losses.
Furthermore, Fitch said that interest rates on new money investments still exceeded the rate on maturing bonds in most instances, but a shift to declining rates across most jurisdictions would gradually reduce the margin.
"Further improvements in the strong credit fundamentals
are less likely at this point of the cycle."
“With reinsurers fixed-income portfolio durations typically between three and five years, the level of unrealised losses from reductions in market value relative to amortised values will continue to decline as bonds mature and interest rates decline or stabilise, with very limited credit losses,” it said.
“Fitch believes the reinsurance market has started softening, but heightened loss activity could slow or stop this trend,” said Manuel Arrivé, CFA, Director, Fitch Ratings, in the report. “Further improvements in the strong credit fundamentals are less likely at this point of the cycle.
Downside risks remain elevated, but we believe the sector is in an even stronger position than a year ago and will defend itself against potentially less favourable market conditions.”
Separately, AM Best, the insurance specialist rating agency, revealed in its pre-Rendez-Vous de Septembre report that the global reinsurance industry has seen strong technical results amid an ongoing shift to the IFRS 17 reporting standard that has altered the performance analysis of these companies.
Also, AM Best said that there was “growing optimism" in the global reinsurance segment related to the steep price increases in its “Annual Review of Global Reinsurance Industry”.
This view is more positive than in 2023 - last year AM Best released a report before the Monte Carlo event that showed investments by a segment of reinsurers had unspecified financial losses in H1 2023 due to fixed income securities in investment portfolios performing worse than hoped for.
In the August 2023 Market Segment Report, “Global Reinsurers Face Challenges Even as Conditions Improve”, the ratings agency said that despite the bearish pressures on investment results, it expected that reinsurers would “generate underwriting profits in 2023”, keeping them in the black.
The Rendez-Vous de Septembre in Monte Carlo is on until later this week.
