AM Best maintains negative outlook on US P/C reinsurance sector

AM Best is maintaining its 2018 outlook for the US property/casualty reinsurance sector at negative, citing the pronounced pressure on US property catastrophe rates as the  alternative capital market presence in the property catastrophe space continues to grow.

The Best’s Briefing, titled, ‘Market Segment Outlook: US Property/Casualty Reinsurance,’ states that companies’ earnings going into third-quarter 2017 already had been depressed compared with historical trends. This was due to ongoing market challenges that suppressed current accident-year underwriting performance, which, together with lackluster investment returns, has served to drag the sector’s operating and overall performance to a marginally sufficient level.

The negative impact of catastrophe losses on underwriting earnings in 2017 has further eroded the segment’s historical earnings, although the market’s capacity to absorb these events has proven resilient and balance sheets remain solid.

“AM Best is concerned that property catastrophe pricing increasingly is being influenced by the alternative capital market and not the traditional reinsurance market as historically has been the case,” the rating agency stated.

“In addition, given the level of excess capacity in the overall reinsurance market, any near-term market improvement as a result of the catastrophes may be relatively short-lived. The 2017 catastrophe events have proven to be a significant test for alternative capital, which up to this point had enjoyed significant profits attributable to relatively benign US catastrophe losses over the past decade. Should the frequency and severity of these recent losses help set a floor on catastrophe pricing and alleviate the prolonged erosion in risk returns, A.M. Best believes the overall market could somewhat stabilize.”

It noted that an improvement in the US and global economy, as well as future economic benefits stemming from US federal tax reform, will provide opportunities for organic growth and improved utilization of excess capacity. This should aid in improved risk pricing.

“AM Best also expects to see global reinsurers expand their US legal entities by growing those balance sheets and retaining more business onshore as a result of the upcoming tax reform. AM Best also has a negative outlook on the global reinsurance industry,” it said.

It added that it estimates that the combined ratio and return on equity for the US property/casualty reinsurance sector will continue to demonstrate lackluster performance beyond 2017, and the pressure on rates, as well as the uncertainty surrounding the level and sustainability of any improvement in the US reinsurance market environment, are the main drivers behind the negative outlook on the sector.

“In AM Best’s view, companies with robust balance sheets, 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,” it said.

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