Bermudian-based insurers and reinsurers will likely see continued firming of pricing in 2020, with surplus growth and modest gains in underwriting profits driven by organic growth opportunities and solid capital levels, according to Fitch Ratings.

Recent financial performance for the Fitch-rated peer group has been supported by higher unrealised investment gains and lower catastrophe losses, both of which can be lumpy in nature and difficult to forecast, it said in a statement.

While insurers and reinsurers maintain robust risk management and generally solid business profiles, downside risks include intense pricing competition and low investment yields amid robust levels of capital, which will continue to limit profitability over the medium term, according to Fitch.

It expects reinsurance pricing to improve at midyear. Casualty reinsurance overall demand is increasing, it noted, while improvement in underlying insurance pricing is being seen through proportional treaties, with higher litigation defence and settlement costs have a growing influence on claims.

However, whether the rate increases will be adequate to cover the rising loss cost severity from social inflation and escalating jury awards remains to be seen, Fitch said.

The rating agency said the January renewal season fell below expectations.

“However, April (Asia-focused) and June (Florida-focused) renewals are ripe for more sizeable reinsurance rate increases given that these accounts were most affected by catastrophe losses,” Fitch said.

“European property rates were flat to slightly down, as losses have been limited and capacity remains abundant. For US property, meaningful rate increases were limited to loss-affected areas, as non-loss affected accounts were flat to up slightly, with pricing tempered by continued very strong industry capital levels.”

Continuing its forecast for the near-terms, Fitch said underwriting may see less improvement from falling catastrophe losses, with reserve pressure expected in 2020 due to rising loss severity.

“Average catastrophe losses can vary significantly from year to year and added six to seven points to the estimated combined ratio in 2019 versus adding 11 points the year prior for the group of nine Bermudian-based (re)insurers Fitch actively follows,” the agency said.

“The 2019 estimated combined ratio was 96 per cent to 97 per cent, down from 99.5 per cent in 2018. Favourable reserve development was only one point in 2019, which could turn adverse in 2020 as casualty reserves weaken.”

It said companies have been favouring organic growth given the favourable pricing environment, with no recently announced M&A activity.

“Rising valuations of (re)insurers have also made acquisitions less attractive, with a dwindling pool of potential targets following years of consolidation. However, firms not able to capitalise on firming pricing trends may be more vulnerable to takeover when the market eventually softens,” Fitch said.

Alternative reinsurance capital contracted $4 billion in the first nine months of 2019 to $93 billion from the prior year. This was partly due to redemption requests as investors seek higher returns, concerns over loss reporting that has trapped capital as well as potential climate change considerations. However, Fitch said capital market participation will likely resume this year as investors return to the ILS market, driven by improved return opportunities.

The agency added: “(Re)insurers continue to manage the regulatory environment, with Bermuda recently granted reciprocal jurisdiction status by the NAIC in the US and also fending off a temporary placement on the tax haven blacklist by the EU.

“While the (re)insurers do not appear to be negatively affected by the temporary blacklisting, an extended blacklist designation could cause permanent reputational damage and/or result in loss of business to other jurisdictions.

“Capitalisation is expected to remain robust as underwriting gains and increased investment contributions and strong equity markets have supported returns.”

Fitch said Bermudian-based insurers’ and reinsurers’ equity grew 15 per cent in the first nine months of 2019, “providing most individual insurers with resources to absorb near-term volatility and the effects of adverse events”.