S&P affirms stable reinsurance sector outlook despite US casualty concerns

S&P Global Ratings has maintained its stable view on the global reinsurance sector for a second consecutive year, after deciding against an upgrade to positive due to persistent concerns around US liability loss reserves.

The rating agency’s stable view was underpinned by the global reinsurance industry earning its cost of capital in 2023 for the first time in four years.

With broad improvements in capital adequacy, S&P expects the sector to again meet its cost of capital in 2024-25.

Reinsurers’ earnings prospects for the period were described as “sound” following strong operating results in 2023 and H1 2024, driven by high profit margins, favourable pricing in short-tail lines and strong investment income.

Speaking at a media briefing in London, Ali Karakuyu, director and lead analyst at S&P, revealed that the rating agency had considered upgrading the sector outlook to positive.

“Reflecting the pricing environment, we had a very serious discussion whether it should be positive, but we landed on stable. The reason for that is the uncertainty about what may happen on the casualty lines,” he said.

“This isn’t just about social inflation and the additional themes such as PFAS. In our view, there’s enough uncertainty to stay away from a positive sector outlook as we sit here.”

Casualty pricing remains under scrutiny as inflation risk threatens adverse development on US liability loss reserves, particularly from the soft underwriting years of 2014-19.

“On casualty, the headline and general consensus is that US liability casualty is under pressure. Very specific lines are facing some pressure points,” Karakuyu continued.

“But net-net, in aggregate, various casualty lines’ reserve releases are offsetting some of the additional reserves that have been put aside for the casualty lines. It’s an area that we focus on a lot.”

Despite the “noise” around US casualty, S&P has forecast reserve releases of 1-2 percent in 2024 and 2025.

In addition, the sector is projected to produce an aggregate combined ratio of between 92 and 96 percent for the same period. Karakuyu noted that the sector combined ratio of 91.5 percent in 2023 was “exceptional”, as generally in prior years it exceeded 96 percent.

Property reinsurers to defend higher attachment points

Attachment points were underlined as a key focus of 1.1 renewal discussions, rather than pricing.

Property reinsurance pricing largely remains favourable in short-tail lines, although renewals this year began to show some rate decreases depending on the line of business and region.

S&P attributed the moderate downward pressure on rates in part to increased capacity among reinsurers.

“In 2023, reinsurers said enough is enough, and essentially asked primary players to have more skin in the game. Hence attachment points were higher, and although 2023 was an active nat cat loss year, the loss for reinsurers was not that much because the attachment points were higher,” explained Karakuyu.

“In our discussions now with the C-suite of global reinsurers, we know that primary companies are asking for those higher attachment points to be lowered. Our basic assumption is that the sector will defend – at least it will work really hard to defend – what they’ve achieved, rather than to put downward pressure on it.”

As noted above, reinsurers’ strategic positioning helped them to, for the most part, avoid last year’s elevated nat cat losses from secondary perils – although they remain exposed to potential outsized losses from primary perils.

According to S&P, the top 19 global reinsurers typically take 20 percent of total industry cat losses, but shares have reduced over the past four years, with just a 10 percent share of the $10.8bn annual aggregate net cat loss in 2023.

However, S&P analysts emphasised that reinsurers will not be less exposed going forward – their 20 percent share will remain, but the amount of nat cat losses will continue to increase.

According to S&P, reinsurers have a nat cat budget of $19.2bn for 2024. In comparison, the 2023 budget of $17.1bn was not exceeded, with cumulative actual losses of $10.8bn.