The outlook for the reinsurance sector is being held at negative by A.M. Best, which cited continuing market challenges that will hinder the potential for positive rating actions and may eventually bring negative rating pressures.

The strain on profitability is evident in reduced risk-adjusted returns, with market headwinds presenting significant longer-term challenges, said the briefing titled “Global Reinsurance Outlook Maintained at Negative.”

“Recent indications of a market bottoming are slowly emerging, but the overall operating environment remains negative, which is concerning,” said Robert DeRose, senior director, A.M. Best.

“Negative factors such as low rates, broader terms and conditions, the unsustainable flow of net favorable loss development, and anemic investment yields will continue to adversely impact risk-adjusted returns over the longer term,” the briefing said.

Alternative capital, which now comprises approximately 20 percent of dedicated global reinsurance market capacity, continues to exacerbate competitive pressures, it continued.

“While rated balance sheets are currently well-capitalized and capable of withstanding various stress scenarios, this strength may erode over time for some carriers as earnings come under increased pressure, favorable reserve development wanes, earnings grow more volatile and the ability to earn back losses following events is prolonged by the instantaneous inflow of alternative capacity,” said a summary of the briefing.

“These issues have placed unrelenting pressure on underwriting discipline, forcing insurers to exercise restraint or risk long-term viability,” DeRose went on to say.

“In A.M. Best’s view, companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better positioned to withstand the pressures in this difficult operating environment and have greater ability to target profitable opportunities as they arise,” the report continued.

“The companies that are not proactive will not lead their own destiny,” A.M. Best cautioned, predicting that several franchises existing today “will be sporting the logo of another brand by the time this soft market has run its full course.”

“M&A activity remains an important strategic option to gain greater scale and diversification as companies navigate the market cycle,” the briefing said.

However, A.M. Best warned of the potential hazards of M&A, which can have positive or negative rating consequences “depending on the quality of the partners, earnings accretion and execution risk.”

Source: A.M. Best