Global reinsurers continue on stable footing: A.M. Best

A mixture of positive and negative effects is leaving the global reinsurance market in a relatively stable ratings position, according to a new report by A.M. Best.
The rating agency says while reserve issues continue to plague the industry, current underwriting discipline and profitability are making for a much friendlier ratings environment.
“Headline accident year profitability has been robust to date, although the ongoing highly active hurricane season will see full-year results worsen from the half-year position for a number of reinsurers,” the report notes. At the same time, while come reinsurers are benefiting from more conservative underwriting practices, others have disappointed in terms of results given what is expected following a period of hard market pricing conditions this of particular concern as the industry heads into a soft market period.
As well, the industry continues to suffer from adverse reserve development on prior year claims in the U.S. casualty segment. The report points to the latest victim, Converium Re, which recently boosted reserves and restructured its North American operations (including placing its Canadian branch into run-off).
There is a significant gap between the expectations of primary market companies and their reinsurance counterparts in terms of reserves. “With adverse development most commonly recognized into the 3rd and 4th quarters, it would be very optimistic to assume that no further bad news will emerge from the reinsurance market over the coming months.”
One issue heading forward will be capital management, given the onset of the soft market, and how reinsurers will balance shareholder concerns with capital adequacy. “Returning capital to shareholders and writing less new business in a soft market makes every sense economically. But, since reserve and asset risk will persist, there is the consequent need to retain capital to support this if a reinsurer’s financial strength is to be maintained. If however, in doing so reinsurers feel pressure to then use this capital to write more volume, then the widely claimed commitment to underwriting discipline will prove to be as much of an illusion this time around as in previous cycles.”
Overall, the rater predicts the industry will not return to its historical levels of financial strength, but will find a new balance to support ratings in the “A+” to “A-” range.