Reinsurance industry should brace for more challenges: A.M. Best

Continued benign loss environment and strong performance by select publicly traded reinsurers in the first half of 2015 resulted in a healthy increase in average share price, but those positives seem to be giving way to challenges afoot in the industry, suggests a special report released last week by A.M. Best.

Just three of the 18 publicly traded worldwide reinsurers – including the four top European players – had negative performance over the first half of the year, states Reinsurance Industry Facing More Challenges Ahead But For How Long?

“The stock process of publicly traded reinsurance companies ended the second quarter of 2015 well above the overall market, driven by the continued benign loss environment and strong performance” of Swiss Re, Munich Re, SCOR and Hannover Re, notes a statement from A.M. Best.

The group of followed public companies saw an average share price increase of 8.1% compared with the market total return of -0.2% during the first half of 2015, the statement adds.

Those positives, though, have not extended in 2015 Q3. “The report notes the market has taken a turn for the worse so far during third-quarter 2015, and returns for most companies are officially negative for the year,” states A.M. Best. “The market remains challenging and returns are starting to show signs of stress,” the rating agency adds.

Pricing pressures for Cat business were well evident for 2014 and continued during the June/July 1 renewals, A.M. Best notes, pointing out that June 1, 2015 renewals reported a decline in reinsurance price between 5% to 10%.

“The dramatic price declines in 2014 and so far in 2015 continue to be attributed to the lack of market-changing losses, increased retentions carried by ceding companies and the abundance of capital in the market.

With the continuing challenging and competitive environment, “companies are under pressure to deliver underwriting profits, so the need for a wider footprint and broader scale becomes fundamental for companies competing in the current market,” A.M. Best explains. The realization by certain companies of the need to create a more diversified and global book of business will likely feed the continuation of merger and acquisition deals over the course of 2015, it notes.

“The new reality for the reinsurance market looks to be more of an industry where returns are less impressive and underwriting will have to become a larger contributor to profits and returns, leading to more conservative risk selection, more diversification of product offerings, a wider geographic reach and conservative loss picks,” A.M. Best states.