Reinsurers have been delivering solid operating results, with publicly traded reinsurers currently outpacing the overall equity market – but this good fortune may not be sustainable, given the headwinds that are buffeting the industry, according to a report published by A.M. Best.

The stock prices of publicly traded reinsurers, including the “Big Four” European companies (Swiss Re, Munich Re, SCOR and Hannover Re) increased moderately during 2015, remaining well above the overall market, said A.M. Best in a report titled “Reinsurers Enjoy Good Fortune, but Is It Sustainable?”

Looking at 18 publicly traded worldwide reinsurers, A.M. Best said the largely favorable share price movement of the group was driven by the strong performance of several reinsurers – including the Big Four – with the share price of Hannover Re and SCOR experiencing the largest increases.

“In addition, nine of the U.S. and Bermuda reinsurers experienced double-digit increases in share price … led by Partner Re’s upsurge of more than 20 percent,” the report revealed.

Only two of the 18 analyzed by A.M. Best – Greenlight Re and Allied World – experienced negative stock price movement last year and only three others achieved gains of less than 10 percent, A.M. Best continued.

Despite the evidence of generally strong stock prices, the report indicated that several headwinds are hitting the sector over the near and medium term – or more than 12 to 18 months.

“The reinsurance market remains under pressure from renewal rate declines, broader contract terms and conditions, and the dual limiting threats to operating profitability of low investment yields and continued pressure from alternative capital….”

Rating pressure is exacerbated by another year of benign catastrophe losses, net favorable loss reserve development from prior accident years as well as the desire of reinsurance buyers to increase their net retentions – given the industry’s overall balance sheet strength, the report noted.

“Low investment yields, continuing pressure from the presence of ample convergence capital, and the likelihood that net favorable prior year loss reserve development will soon wane could lead the reinsurance market to produce less impressive returns,” the report said.

And, of course, the report emphasized, catastrophe losses inevitably will rise again at some point.

“It is likely that the strain on profitability in the current reinsurance market, stemming from well-capitalized reinsurers, coupled with convergence capital still flowing into the market, will place more stress on risk-adjusted returns over the near term,” the report added.

Despite the commitment from reinsurers’ management teams to maintain underwriting discipline, there is some concern that companies may be willing “to withstand some level of margin compression in order to protect market share,” A.M. Best warned.

Strategies for a Difficult Market

“Reinsurers that prudently diversify their portfolios, broaden their product and geographic scope, and employ capital management strategies that show foresight in the face of this challenging cycle are the best candidates to effectively maintain advantageous market positions … and remain attractive to equity investors,” the report went on to say.

And reinsurers that have the ability “to pursue market opportunities available for both primary business and reinsurance” will be in the best position, A.M. Best, noting that pricing in the primary sector remains more stable.

The report suggested diversification to broaden geographic scope “in order to keep meeting the market demand in growing areas such as life and annuity reinsurance, U.S. mortgage credit risk and emerging risks such as cyber liability.”

“Pending regulatory changes in the European Union and China, along with rating agency capital model changes or adoptions driven in part by desires for greater global equivalency may lead to some opportunities for reinsurers to meet burgeoning needs of their primary insurers,” the report went on to say.

A.M. Best said the most successful reinsurers will exhibit:

• great depth and breadth of coverage capabilities combined with the expert judgement in deploying the capacity to provide these broader coverages
• proven underwriting expertise
• excellent enterprise risk management practices, both internally and for its external relationships with clients and customers
• outstanding service capabilities.

Source: A.M. Best

*This story appeared previously in our sister publication Insurance Journal.