Only one worldwide reinsurer had negative performance during Q1 2015: A.M. Best special report

Of the 18 publicly traded worldwide reinsurers (including the four top European players), only one had negative performance during the first quarter of 2015 and only two performed worse than the overall market, ratings firm A.M. Best Company said in a Best’s Special Report last week.

For publicly traded reinsurance companies, including Swiss Re, Munich Re, SCOR and Hannover Re, stock prices ended Q1 2015 “well above the overall market, driven by the continued benign loss environment and strong performance by the large four European companies,” the special report said. “In fact, the group of all followed public company’s return during 1Q15 was an average share price increase of 8.3% versus the market total return of 0.4% for the same time period.”

The report said that “management teams indicated that they remain disciplined and will continue to reduce their books of business as necessary. For many, the readjustment of their reinsurance books of business continued during the first quarter, particularly for property CAT. Portfolios continue to be more weighted toward primary business given that pricing continues to be relatively more attractive and access to the business easier than on the reinsurance side.”

Some reinsurers, however, did indicate that pricing pressures and competition is becoming more pronounced on the primary side and that it is becoming more challenging to find good profitable business, the report said. “Companies agree that 2015 will remain challenging and will lead to an even more careful approach to risk selection and likely more M&A deals as some struggle to stay relevant in the market.”

The reinsurance industry remains challenging, with Jan. 1 and April 1, 2015 renewal pricing continuing to decline in the double digits and commissions rising in the low- to mid-single digits. “The expectation remains that reinsurance pricing overall will remain under pressure in 2015 given continued pressures from alternative capital and the lack of any price changing event over the past few years,” the report said.

In 2014, US$8.8 billion had been issued in CAT bonds alone, representing a 15% growth from 2013. “Thus far in 2015, $4.0 billion in CAT bonds have been issued,” the report said. “Given the current market environment, reinsurance and retro pricing is expected to remain under pressure going forward. The intensified competition in property reinsurance and CAT continues to spill over to other lines of reinsurance as companies attempt to expand their product offerings and global presence. This, in turn, continues to put upward pressure on ceding commissions on quota share placements and leading to more multiyear contracts, broader contract terms and increased signings on aggregate covers. These conditions are likely to remain throughout the year absent any major event.”

As favourable reserve releases start to diminish and companies are under pressure to deliver underwriting profits, the need for a wider footprint and broader scale become fundamental for companies competing in the current market, A.M. Best said. “For 2015, returns are expected to get increasingly more challenging if capital continues to enter the market, reserve releases decline, pricing continues to soften in the double digits and cedents continue to retain a larger portion of their business,” the report concluded. “The market could possibly experience lower ROEs and an uptick in combined ratios as commission expenses continue to increase and premiums continue to declines in 2015.”