A.M. Best Co. Inc. has revised its outlook for the reinsurance sector to “negative” from “stable,” citing strains on profitability which could result in ratings pressure for reinsurers.
Continued compression on investment yields and underwriting margins “will ultimately place a drag on financial strength,” said Best in “Weakening Operating Fundamentals Tip Reinsurance Sector Outlook to Negative,” which was issued Tuesday.
The ratings agency said that its view is longer term than its typical 12 to 18 months, and while it does not expect a “significant” number of negative outlooks or downgrades in the very near term, “the market headwinds at this point present significant longer-term challenges for the industry.”
“Reinsurers are being paid less and less to bear risk” largely because of “compressed investment yields, lower underwriting margins and broader terms and conditions,” said Best.
The report also voiced concerns that underwriting discipline, “which until recently had been a hallmark for the reinsurance sector, is beginning to diminish as companies look to protect market share at the expense of profitability.”
Producing even low double-digit returns will become difficult and will require “optimal conditions” including continued small catastrophe losses, net favorable loss reserve development and stable financial markets, said the report.
“Companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better positioned to withstand the pressures in this type of operating environment, and have greater ability to target profitable opportunities as they arise,” said Best.