Fitch: LatAm reinsurers’ performance to remain strong in ’25 while ceded premiums will increase

Latin American reinsurers will maintain their strong performance in H2 2024 and into 2025, supported by market discipline, according to Fitch Ratings, which expects ceded premiums in the region to continue to grow.

In a new report, Fitch said it expects Latin American reinsurers’ performance in the second half of 2024 and into 2025 to remain strong supported by market discipline.

“Nonetheless, global reinsurance capacity can be deployed in Latin America to gain market share and diversification in this region, which would generate competition for regional reinsurers,” it added.

Fitch commented, however, that hard reinsurance market conditions could extend in the region if insured losses remain high.

The rating agency’s neutral outlook for global reinsurance applies to Latin America, assuming strong capitalisation and adequate financial performance despite macroeconomic risks.

Latin America reinsurers are also influenced by sovereign risk, and negative changes in sovereign ratings could affect their ratings.

Fitch said that reinsurance supply and demand “have reached an equilibrium” in the region.

“The favourable reinsurance returns have added capital and attracted more supply from traditional and alternative sources, partially offset by repurchases and dividends as growth opportunities lessen and investors demand return of capital,” the report said.

Capacity remains selective in some lines despite additional capital. Capacity for property catastrophe risk in Latin America may be limited or market conditions harden if high losses persist.

“Fitch expects market rates to be mostly flat in 2025 and terms and conditions to broadly hold steady. Premium growth is likely to continue, although at a reduced pace as the market becomes more competitive,” the report said.

It added: “We expect rate increases in the underlying primary insurance business, helping to support reinsurance rates through proportional treaties.

Hard market conditions could extend in property cat

Fitch noted that the Latin American reinsurance sector is strongly influenced by global reinsurance conditions given its relatively small size.

“Hard market conditions permeated Latin America in the last couple of years, benefiting regional reinsurers’ results,” the report said.

It continued: “Nonetheless, as global reinsurers deployed capacity to higher-returns line of businesses, reinsurance demand for catastrophe risks increased for local reinsurers. Hard market conditions may extend in time for riskier business such as property catastrophe, as the region’s catastrophe-related losses increased in 2023 specifically by hurricane Otis in Mexico and drought and heatwaves in South America.”

Latin America experienced catastrophe economic losses of around $45bn in 2023, which was the second highest in a decade after $195bn in 2017.

Hurricane Otis in Mexico accounted for insured losses of around $3.4bn and total economic losses of $33bn.

“Insured losses in 2023 of $6bn were manageable relative to insured losses from 2017 of nearly $53bn. However, the substantial difference between economic and insured losses in Latin America continues to highlight the importance of narrowing the protection gap,” the report said.

Ceded premium grew 20% from 2019

According to Fitch, ceded premiums in Latin America grew from $19.7bn in 2019 to $23.6bn in 2023, mirroring the insurance market's expansion. However, the net premiums written to gross premiums written ratio remained stable at around 85 percent despite this growth.

All countries in the region experienced an increase in ceded premiums except El Salvador, where they fell 5.6 percent due to pension reform.

The three countries with the highest increase in ceded premiums were Mexico (33.8 percent), Dominican Republic (25.2 percent) and Colombia (16.3 percent), with the latter two ceding more premiums related to gross premiums written due to higher exposure.

“We expect the trend of increasing ceded premiums to continue over the next 12-18 months due to organic market growth, higher natural catastrophe frequency, and inflation-driven exposure,” the report said. “Insurers managed to maintain a stable retention rate despite facing limited capacities, higher renewal rates, and tighter conditions in 2022 and 2023.”

Non-proportional reinsurance costs increased in all countries that disclose these costs separately, except Mexico. Reinsurance commissions were lower except in Nicaragua and El Salvador, due to more restrictive global reinsurance conditions.

On average, reinsurance commissions on ceded premiums decreased to 17.7 percent in 2023 from 18.2 percent in 2022.

Stable outlook for LatAm reinsurers

Fitch said the Latin American reinsurers that it rates faced 2023 with a strengthened credit profile benefitting from the hard global reinsurance market conditions in 2022 and 2023.

Fitch took positive national scale rating actions on two reinsurers and affirmed the remaining, all with a stable outlook.

Fitch in May 2024 upgraded the national scale IFS rating of Mortgage Credit Reinsurance Limited to ‘AAA(pan)’ from ‘AA+(pan)’, which followed it in November 2023 upgrading the national scale IFS rating of Reaseguradora Santo Domingo (Reasanto).

“We expect reinsurers to maintain stable credit profiles for the next 12–18 months as reinsurance is key to Latin American insurers’ risk mitigation strategies and financial performance, with a stable and strong demand for reinsurance protection,” the report said.

Discussing the Brazilian reinsurance market, Fifth noted that IRB-Brasil Resseguros is the leader in the Brazilian reinsurance market, with about a 24 percent market share as of the first half of this year.

Fitch said that IRB’s of 2023 registered net income of BRL114mn turned around the losses registered in 2022 and 2021 and proved its strategy of reducing risks, consolidating its business in Brazil, and operating selectively in Latin America and International markets.

IRB maintains its target for business in Brazil to account for 80 percent of the portfolio, with 15 percent in written premiums in Latin America and 5 percent in other markets.