AM Best sees tough times for reinsurers
Tough times lie ahead for reinsurers and some may struggle to survive, according to rating agency AM Best.
In a special report on the industry's first quarter, AM Best notes that the group of 16 companies it monitors — half of which are based in Bermuda — have experienced further falls in pricing, suggesting that the market has not yet hit rock bottom.
Those achieving significant growth have done so through acquisitions, the report added, and the outlook remains problematic.
“The challenges facing global reinsurers with the first quarter of the year completed remain daunting,” AM Best stated.
“Renewals for the January 1 and April 1, 2016 dates do not appear to have spawned any significant hope that price stabilisation is on the horizon any time soon.”
The report that there had been around $10 billion of insured catastrophe losses in the first quarter, including the Fort McMurray wildfire in Canada, “although the reinsured portion of these losses is still well within annual catastrophe budgets”.
“The considerable capacity for property catastrophe risks has somewhat tempered momentum towards price stabilisation in peak zones,” AM Best stated. “However, it remains to be seen if the global catastrophe losses suffered during the first several months of the year and the speculation that the Atlantic hurricane season may be more active than in recent years, will cause any type of discernible shift towards more conservative risk selection or pricing, particularly for the property catastrophe business.”
The rating agency added that “with reinsurers' balance-sheet strength still strong and available capital remaining abundant, pricing will likely stay under pressure, with broadening terms and conditions further pressuring results”.
The report noted that three Bermudian reinsurers saw large gains in gross premiums written as a result of acquisitions. XL Group saw a 76 per cent spike year over year after acquiring Catlin, RenaissanceRe a 34 per cent rise after buying Platinum Underwriters and Endurance Specialty a 24 per cent increase after acquiring Montpelier Re.
AM Best expects the merger trend to continue as reinsurers seek “increased portfolio diversification and enhanced global presence in the reinsurance marketplace”.
The report adds: “If market competition intensifies, more companies under pressure to deliver underwriting profits may view acquisitions to achieve broader scale and a wider footprint as fundamentally necessary to being viable long-term market participants.
“Successful deals, however, will require effective plans for integration and a clear rationale and forward-looking strategy for the combined entity to flourish going forward.”
With interest rates still hovering near record lows and squeezing investment returns, reinsurers are relying heavily on underwriting to generate returns.
“With that being the case, circumspect risk selection, expansion of product offerings, widening geographic reach either organically or through acquisition, and conservative loss picks will be key tenets,” AM Best stated.
“Even doing the right things may not insulate reinsurers from tough times ahead. Despite sound strategies, not all reinsurers will survive or excel in the end.
“Global reinsurers that have established a strong foundation of proven, effective underwriting and reserving principles, especially those with diversified portfolios, will have the best chance to remain relevant and profitable in the current market.”