Disciplined underwriting key in overcapitalized global reinsurance sector: A.M. Best

Current conditions in the global reinsurance sector, which remains overcapitalized, demand that disciplined underwriting be the focus of reinsurers, including those that are reducing their books of business to address those challenging conditions, suggests a new report issued Monday by A.M. Best.

Despite the reinsurance market’s ability to prove resilient, “as most companies continue to indicate that intense competition is leading to lower underwriting margins for certain lines of business, the need for disciplined underwriting now more than ever should remain the focus,” states Global Reinsurers: Who Will Gain Despite All the Pain?

The outlook for 2015 is clearly challenging, “with rates continuing to decline for some lines of business, terms and conditions becoming even broader, and ceding commissions increasing further.”

The coming year is expected to foster an approach to risk selection that is even more careful than that in 2014, which saw companies starting to reduce their retained exposure to classes of business that did not meet acceptable return hurdles and, instead, expand in classes that offered better opportunities.

“The orderly approach to risk selection appears to be working for global companies, and most are expected to remain cautious on the business they write as capacity remains high and the market becomes increasingly competitive,” notes the report. That said, “companies that write predominantly reinsurance and focus on underwriting are in danger of reducing their books of businesses to levels that may render them less relevant in the market, which could lead to more merger and acquisition activity,” A.M. Best cautions.

Citing a number of acquisitions over the past year – including the January 2015 announcement that XL has entered a definite merger agreement to acquire Catlin – these are all examples “of the need for greater global scale and diversified product lines and distribution, replacing the days of specialty-focused reinsurance companies. Companies with well-diversified businesses and a global reach likely will only get larger as smaller players put themselves up for sale or seek strategic partnerships to survive,” the report continues.

With regard to pricing, there was double-digit declines in certain lines of business in 2014. “Reinsurance pricing overall is expected to remain under pressure in 2015, given the lack of any price-changing event over the past few years.”

The report notes that January renewal pricing for property contracts was once again down 10% to 15% for both United States and European risk.

Other findings in the report include the following:

• With new capital and reduced reinsurance purchasing by some large cedents, market conditions are expected to remain challenging for the reinsurance business in 2015 and lead to further pressure on pricing, particularly in property and cat lines.
• Favourable reserve releases and the lack of any major Cats over the past few years continue to aid combined ratios for the entire industry.
• Given the strong capital positions of many companies, share buybacks are expected to remain a strategy for companies looking to improve returns for shareholders, and that will slightly offset some of the challenges companies face on the income side.
• Returns are expected to become even more challenging if capital continues to enter the market at such a high rate, reserve releases decline and pricing continues to soften in the double digits.
• Conditions will remain competitive and challenging, as primary companies are expected to continue retaining more business and/or seeking higher ceding commissions or multi-year contracts for sharing their profitable business.

With regard to the last point, “A.M. Best is forecasting underwriting performance for the United States and Bermuda to produce an average combined ratio of 94.8 and an average (return on equity) of 8.2% for 2015, representing a stubbornly difficult market environment and a normal level of catastrophe activity.”