S&P: Positive H1 results helped drive reinsurance outlook revision to stable

Positive movements in pricing and terms and conditions are anticipated to continue into the 2024 renewals, with this sustained momentum fuelling bullish expectations that the global reinsurance sector will meet its cost of capital in 2023 and 2024, according to Johannes Bender, reinsurance sector lead at S&P Global Ratings.

Bender spoke to The Insurer on the sidelines of this year’s Rendez-Vous in Monte Carlo to provide further detail on why S&P decided to upgrade its outlook for the reinsurance segment to stable from negative at this point in the year.

He explained that this was mainly due to the continued alleviation of factors that had originally underpinned the negative outlook in May 2020.

“That was the year when Covid-19 kicked in and brought additional uncertainty, but that wasn't the whole story. It was a process – since 2017, the sector had been struggling to produce good returns, and there were concerns the cost of capital had not been matched,” Bender explained.

“Looking at last year’s big developments – cat losses, Covid-19, the Russia-Ukraine conflict – in the end, reinsurers take a large share of these, from an insurance perspective. So that really was a challenge for the sector.”

He added that while the sector is yet to meet or exceed its cost of capital in a full year, results from the first half of 2023 indicate a positive movement.

“There’s the question, why the revision now and not before? We were cautious, and we didn't see it as tangible enough. We're certain this is going to persist, it's become more visible in the earnings in the first half of the year.”

Bender continued that general positive momentum in pricing and terms and conditions is expected to carry over into the 2024 renewals, particularly on shorter lines.

With improved operating performance forecasted across the global reinsurance sector – S&P forecasts a net combined ratio between 92 percent and 96 percent at the end of 2023 and 2024 – the upgraded outlook also indicates S&P’s expectation of credit trends.

“We also reflect the sector revision in ratings and outlooks for respective companies,” Bender noted. “For example, Swiss Re was revised to stable from negative, while Munich Re is now on positive outlook from stable.”

Currently, around 90 percent of the top 20 global reinsurers have been assigned stable rating outlooks, with positive and negative both at ~5 percent.

This compares to just a few years ago when S&P held more negative outlooks than positive. Bender noted that this negative bias was predominantly driven by industry trends, such as lower performance as a result of the changing market.

He added that, at the moment, positive and negative company rating outlooks are likely influenced by additional factors outside the reinsurance sector, such as parent company ratings and sovereign rating actions.

Simon Ashworth, head of analytics and research, insurance at S&P, added: “When considering to lift or reverse back the outlook for the sector view from negative to stable, there's fewer industry-wide pressures that are impacting credit ratings.

“The positive and negative outlooks are much more driven by issuer-specific, idiosyncratic topics that are very specific to those issuers. Broader industry pressures have been generally alleviated.”

Reinsurers have certainly become more distinctive in recent years as divergent approaches emerged for property cat business.

According to Bender, from the cohort of the top 20 global reinsurers that form S&P benchmark for data, assessment of risk appetite found that the majority decreased their nat cat risk in 2022.

“There's still a divergence of strategies. There's public examples where companies said they are going to be more cautious on cat risk and try to write other businesses, so that's an interesting trend,” he said.

Bender concluded: “You can always argue over when is the right time to revise the sector view, but now we're quite certain.

“Hearing conversations, it doesn't look like the industry is willing to go into a soft cycle at this stage. It looks like there is consensus that there needs to be more of a track record of earnings satisfaction as seen in the first half of the year.”