Citing “weakening operating fundamentals” for reinsurers at large as the market continues to soften, A.M. Best has revised its outlook for the sector to negative.
“It remains difficult to stray from the simple fact that compressed investment yields, lower underwriting margins and broad terms and conditions place a strain on profitability, and that reinsurers are being paid less and less to bear risk, A.M. Best said in its Aug. 19 briefing explaining the ratings change.
The negative outlook is based on a number of warning signs, A.M. Best said.
“Broadly speaking, rated balance sheets are currently well capitalized and capable of withstanding various stress scenarios,” A.M. Best said. “However, over time this strength may erode as earnings come under increased pressure and grow more volatile, favorable reserve development wanes and the ability to earn back losses following events is prolonged by the instantaneous inflow of alternative capacity.”
A.M. Best said that these points of worry, considered together, “reflect increased concern that underwriting discipline is beginning to diminish as companies look to protect market share at the expense of profitability.”
Who can weather this? A.M. Best said that companies with diverse portfolios, advanced distribution capabilities and a broad geographic research are better able to function “in this type of operating environment” and can more easily pursue profitable opportunities when they came up.
But A.M. Best said that the current environment will require “optimal conditions, including benign or near-benign catastrophe years, a continued flow of net favorable loss reserve development and stable financial markets, to produce even low double-digit returns.”
A.M. Best is the latest outfit to express caution and concern about the increasingly soft reinsurance market. Standard & Poor’s recently said that current conditions jeopardize company financial ratings. Analysts are also predicting more M&A activity in the reinsurance market, particularly the Bermuda companies, due to current conditions.