Reinsurers in Latin America Expected to Face Declining Profitability Through End of 2018

New York-based credit rating agency Fitch Ratings said in a recent report that demand for reinsurance in Latin America will remain low through the end of 2018 due to slow economic growth. As a result, it is projecting that profitability will deteriorate in the sector over the next 18 months.

The report, “Profitability Facing Turbulence,” notes that reinsurers in the region facing these conditions remain vulnerable to ongoing loss ratio increases due to higher inflation, catastrophe losses, and declining investment returns.

“A couple of highly leveraged companies could suffer downgrades or be given negative outlooks.” – Fitch Ratings

The horizon for companies in Latin America is somewhat in line with soft pricing across the globe, however, and the agency stated that it does not believe adverse conditions will lead to a slew of ratings decreases. Overall, it expects reinsurers in the region to maintain adequate capitalization levels and profitability.

Even facing headwinds, Fitch Ratings believes the bulk of companies will only see modest declines in earnings “within the ranges that current ratings can tolerate.” While this is likely to be the industry-wide story, it does foresee a scenario amid subdued demand where “a couple of highly leveraged companies could suffer downgrades or be given negative outlooks.”

Additionally, Fitch stated in its report that there is some probability of a turnaround in the short term. “Reinsurance demand in Latin Americas could improve to some degree, considering that insured catastrophe losses in 2016 almost doubled compared to the previous year, which should further motivate coverage acquisition,” wrote the agency.

In fact, profits could even increase for some firms. “A strong franchise, market position, and deeper knowledge of regional markets have left major reinsurers well placed to adapt and profit from the changing market,” stated Fitch.