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Fitch: Despite massive losses, LatAm reinsurance sector's capital still sound

The Latin America reinsurance industry's capital position is still sound, despite having seen record losses in 2017 on the back of major catastrophic events, according to Fitch Ratings.

Catastrophe economic losses in the region hit US$104 billion during 2017, more than five times the prior record loss of US$20 billion in 2013. The bulk of the losses came from two major storms — hurricanes Maria and Irma — and two earthquakes in Mexico. Together, those four events made up US$101 billion of the year's economic losses and some US$36 billion in insured losses, Fitch said.

However, the rating agency noted that the reinsurance industry was able to absorb those losses without a taking a significant capital hit. LatAm reinsurers use retrocession to manage balance-sheet volatility and follow adequate reserving practice; as a result "the availability of their reinsurance capacity was not compromised as much relative to previous years with similarly sized losses," Fitch said in a July 26 report.

For 2018, the rating agency expects the industry's profitability to improve given the probability that catastrophe losses will return to more normal levels, while reinsurers should enjoy a "marginally positive pricing environment" and growth of ceded premiums in certain LatAm countries.

"Intense competition from global reinsurers and the large reinsurance capital supply have forced LatAm reinsurers to strengthen their strategies towards their regional markets, aiming to capture a larger share of LatAm's increasing ceded premiums," Fitch wrote.

Fitch noted that the large losses suffered last year could drive increased demand in Latin America.