Reinsurance, when the going gets tough
“We consider the European reinsurers’ credit worthiness as high, but facing increasing headwinds,” says Linas Grigaliunas, Head of Insurance at Dagong Global. “The operating environment is challenging and likely to deteriorate further, mainly due to further increasing competition, low interest rate environment, high regulatory costs and mounting geopolitical uncertainty. The industry is still growing, but at reducing rates, challenged by continuing soft pricing, inflow of new capital and no major Natural Catastrophe events,” says Linas Grigaliunas.
“Profitability is still strong, in our view, with 9.4% return on equity in 2016, but is deteriorating. The net income reduced by 17.8% in 2016, driven by shrinking underwriting margins and declining investment income. We consider the capitalization as very strong. The growing capital levels are strengthening the industry’s credit worthiness and loss absorption capabilities, but at the same time are putting strain on profitability and a long-term sustainability of high capital levels,” adds Linas Grigaliunas.
We expect reinsurance industry to maintain its very strong credit characteristics, with the credit strength of the industry driven by the largest players. We forecast operating conditions to remain challenging, especially for the small players, with smaller balance sheets and higher potential of deterioration of credit quality. We estimate the industry to continue growing, but at a slower pace, in the range of 1-2% p.a. We also expect capital to continue increasing and reinforcing industry’s strength and at the same time fuelling price competition and diminishing profitability in the short-medium term. We forecast profitability to decrease, but together with the cost of capital and remain above it for the large players and probably dip below for the smaller players. We also expect evolution of business models and strategies to pick up pace and to provide new opportunities for sustainable and profitable industry development.