Outlook negative as reinsurer results masked by reserve releases and low cats: AM Best

In AM Best's special report entitled Global Reinsurance-Appearances Can Be Deceiving, the rating agency said excess capacity continues to place pressure on reinsurance rates 'across the board'. AM Best maintains its negative outlook for the reinsurance sector. In the face of persistent low rates, increased commissions and tougher terms and conditions, the reinsurance industry generated solid results in 2014 with strong combined ratios and profitable returns, according to AM Best's new report. However the rating agency said: "Results (were) masked by low cats and continued reserve releases."hideAnalysis of AM Best's global reinsurer composite shows underwriting profitability in 2014 and an improvement in overall earnings. The composite produced a calendar year combined ratio of 89.5% in 2014, compared to 88.6% in 2013 and 92% in 2012. According to Munich Re, insured catastrophe losses for the entire year totalled just $31bn, the same as in 2013. This compares to a 10-year average of $58bn. The reported calendar year combined ratio of 89.5% for 2014 also reflects continued favourable loss reserve development that amounted to 5.3 points in 2014, compared with 5.7 points in 2013 and 6.1 points in 2012. The global reinsurance sector has benefited from $56bn in favourable reserve development since 2007, according to AM Best. But it believes that such reserving benefits will decline going forward because the older accident years have given as much as possible and more recent accident years are leaner in terms of potential redundancy. The rating agency said that continued pressure from alternative capital will also adversely affect risk-adjusted returns over the longer term. "Declining rates, broader terms and conditions, unsustainable flow of net favourable reserve development, low investment yields and continued pressure from alternative capital coming into the market are all negative factors that we expect will adversely affect risk-adjusted returns over the longer term," AM Best said in its report. AM Best therefore maintains its negative outlook for the reinsurance sector, saying significant ongoing market challenges will hinder the potential for positive rating actions over time and may translate into negative rating pressures. While the rating agency does not anticipate a significant number of negative outlooks or downgrades over the very near term, it believes 'market headwinds at this point present significant longer-term challenges for the industry'. "Overall, this remains a challenging market, but the reinsurance industry posted solid results for 2014, which was once again driven in part by the lack of large cat losses, continued share repurchases and favourable reserve releases. Conditions will remain competitive and challenging, as primary companies are expected to continue to retain more business and/or seek higher ceding commissions or multi-year contracts. Margin compression also will likely continue as third-party capital seeks a larger piece of the pie," said AM Best. As a result it predicts reinsurance underwriting performance to produce an average combined ratio of 94.8% in 2015 and an average ROE of 8.2%. The competitive operating environment is continuing to pressurise reinsurance rates. "The overflow of capacity...continues to place pressure on business across the board," said the rating agency. "The dramatic price declines in 2014 and for 1 January continued to be attributed to the lack of market-changing losses, increased retentions and the abundance of capital in the market." The 1 January, 2015 reinsurance renewals saw prices decline on average between 5% and 15%. AM Best also said that global reinsurers continue to turn their attention to the primary market in light of its more attractive pricing environment. This should be good news for CRE readers as they benefit from further competition for their insurance business. The report notes that the recent increase in merger and acquisition activity within the reinsurance industry is expected to continue through 2015. The spate of M&A activity in the reinsurance industry, particularly in Bermuda, has seen several deals announced. XL Group signed a definitive agreement to buy Catlin, RenRe is to buy Platinum Underwriters and Partner Re and Axis signed an agreement to combine into a single company through a merger of equals. Just last week Endurance Specialty Holdings Ltd announced a deal to acquire Montpelier Re Holdings Ltd. "M&A activity is expected to continue as the need for scale, global presence and diversified books of business continues to place pressure on companies," said AM Best. "Recently announced deals seem to address the need for greater global scale and diversified product lines and distribution. Cedents want companies that have a wide product offering and a strong market presence which seems to be replacing the days of specialty focused reinsurance companies," it said.

Outlook negative as reinsurer results masked by reserve releases and low cats: AM Best

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