Outlook stable for global reinsurance segment as underwriting discipline continues

Rating agency A.M. Best Co. has issued a stable ratings outlook for the global reinsurance segment going into 2014, expecting a minimal number of ratings upgrades or downgrades over the next year to 18 months.

“Reinsurance companies continue to be disciplined on both the underwriting and investing sides, and net favorable loss-reserve development has cushioned deterioration in underwriting margins and weakness in investment earnings,” notes an outlook briefing from the firm.

“Risk-adjusted capital for global reinsurers remains excellent, and companies have the wherewithal to endure significant losses from a combination of events, including natural and manmade catastrophes and volatile financial market risks.”

However, challenges remain.

A.M. Best notes that there is too much capital going after the same opportunities, placing pressure on reinsurance pricing, terms and conditions.

Third-party capital (from hedge funds and pension funds), also continues to put underwriting pressure on the segment, its report notes. As primary insurers increase retentions, reinsurers are becoming “stuck in the middle,” the firm also says.

“While the risk-sharing struggle between primary and reinsurance companies is significant, it is much different from the inflow of capital entering through insurance-linked securities (ILS) and also into collateralized structures and even rated balance sheets,” the report also notes.

“This external threat (with vast amounts of money) is of concern and could be the game-changer going forward. Reinsurers that have global reach and diversified business platforms, including primary insurance distribution capabilities and the ability to manage third-party capital, are better positioned to withstand these competitive pressures over the near term.”

Overall, the firm said it expects companies to “produce average returns in the high single-digit range, which includes the benefit of favorable reserve releases from older accident years.”

“Despite these lackluster returns,however, risk-adjusted capital is expected to remain extremely strong as companies also reduce their retained exposure to less attractively priced, volatile business classes.”