Competitive landscape likely to pressure returns for reinsurers: A.M. Best

Global ratings agency A.M. Best has maintained a stable outlook for the reinsurance sector, but has warned that the competitive nature of the market suggests that returns are likely to fall below the historical mean. After holding a negative outlook for the reinsurance sector for a number of years, stabilised pricing has seen A.M. Best maintain its stable outlook on the space.

In a new report, the ratings agency notes that while alternative, or third-party reinsurance capital remains significant relative to traditional capital, prior year cat losses and rising interest rates might well drive alternative investment opportunities.

Following the significant catastrophe losses suffered by the reinsurance space in both 2017 and 2018, rates have moved in a more positive direction and have been somewhat sustainable through 2019. Somewhat offsetting the benefits of the improved rate environment for reinsurers is a deteriorating investment climate, which A.M. Best notes has resulted in pressure on interest rates and a global economic slowdown.

“As a result, competition in the space means profitability will continue to be challenged and likely lead to rates of return below the historic mean,” says A.M. Best. The ratings agency’s report focuses on rating actions in the U.S. property/casualty (P/C) industry through the first half of 2019. And, according to the report, during the first-half of 2019 rating downgrades for the U.S. P/C industry outpaced upgrades for the first time in five years.

However, in the reinsurance segment, rating actions led to an increase in the percentage of stable outlooks (77.8%), with two positive outlooks and just the one negative outlook. It’s important to note that this only includes reinsurers that are U.S. statutory filers, which A.M. Best explains is a relatively small sub-sector of the overall reinsurance industry. Despite ongoing underwriting and pricing pressures, driven by intense market competition, A.M. Best states that reinsurers are maintaining robust balance sheets and generating positive operating results on average, when compared with the previous five year period.

“However, the operating environment remains less than optimal and many reinsurers have been bolstering earnings through reserve releases. AM Best believes this practice is unsuitable for the long term and reinsurers will ultimately need to rely on current accident year underwriting performance for quality earnings while investment yield remains at historical lows,” warns A.M. Best.

Looking at the broader U.S. P/C sector, and A.M. Best reveals that as a percentage of all rating actions on U.S. P/C carriers, downgrades increased to 7.1% of total actions in H1 2019, compared with 6.3% in H1 2018. Upgrades were 6.2% of total actions, compared with 7.1% in the same period in 2018. Despite this, the majority (81.7%) of rating actions in the period were affirmations, which A.M. Best says reflects the overall stability of the U.S. P/C sector.

Sourcd: Reinsurance News