Persistent Soft Market Begins to Hit Reinsurer Stock Prices: A.M. Best

By | June 15, 2016

While global reinsurers are continuing to withstand challenging market conditions, their stock prices, on average, are starting to take a hit as a result of the persistent soft market and its negative effect on top line growth, according to a report published by A.M. Best.

A.M. Best analyzed the results of 16 publicly traded companies* (including the European big four – Swiss Re, Munich Re, SCOR Re and Hannover Re), which as a group reported an average stock price decrease of 0.7 percent in the first quarter of 2016.

Trailing the S&P 500 index’s modest increase of 0.8 percent in Q1, the reinsurers’ performance was “far from robust, especially in comparison to the 8.3 percent average posted in the first quarter of 2015…,” said the report titled “Global Reinsurers Continue to Withstand Challenging Market Dynamics.”

Unlike Q1 2015, when stock price rises were “attributable to the European big four, particularly Hannover Re and SCOR Re,” those four companies all experienced share drops in 2016, the report said.

A.M. Best said that eight companies (out of the 16) experienced negative stock price movements during Q1 2016, while one company’s price remained static and three others had only limited stock price growth.

“The less favorable share price movement of the group, on average, was driven by persisting competitive market conditions that have suppressed organic top line premium growth for most reinsurers,” the report continued.

“Reinsurers have been dealing with compressed profit margins in recent years, with the pressure on reinsurance pricing fueled by more than ample capacity in the market and low catastrophe loss activity – in particular, a third straight quiet Atlantic hurricane season in 2015.”

Will Cat Losses Soon Return to Historical Norms?

But there are signs the benign catastrophe environment is coming to an end. A.M. Best cited the Fort McMurray wildfires in Canada and other weather-related catastrophe activity in the first and second quarters of 2016, which have generated more than $10 billion in insured losses globally.

Those reinsurers that have been “over-aggressive in amassing exposure to risks on an aggregate all-perils or worldwide basis, are susceptible to weather-related volatility,” and may find their results adversely affected as losses accumulate, the report went on to say.

“If catastrophe losses return to historical norms, and the ability to rely on favorable prior year loss reserve development diminishes, as A.M. Best believes it will, the likely outcome will result in even greater earnings pressure.”

Other factors affecting the profitability of the reinsurance market are broader contract terms and conditions, low investment income and continued competition from the insurance linked securities (ILS) market, the ratings agency noted.

Some Opportunities

Companies that achieved organic growth in the quarter “mostly found those opportunities limited to specific lines of coverage, such as mortgage reinsurance and, to some degree, accident and health reinsurance.”

However, for most other key lines – such as energy, property and property catastrophe – pricing has remained competitive, A.M. Best said.

The report revealed that demand for reinsurance increased slightly in China and India, “where regulatory developments are changing the landscape and possibly creating opportunities for insurers that could require reinsurance support.”

Looking Ahead

While management teams reiterate intentions to maintain underwriting discipline and reduce books of business if necessary, “even doing the right things may not insulate reinsurers from tough times ahead,” the report indicated.

The challenges facing global reinsurers are “daunting,” A.M. Best acknowledged, pointing to the January and April renewals, which dashed hopes that price stabilization, or a pricing floor, will be seen anytime soon.

Indeed, the report said, abundant property catastrophe capacity has reduced momentum “toward price stabilization in peak zones.”

“Reinsurance pricing is expected to be under pressure throughout the remainder of 2016, partly attributable to the impact from more alternative capital in the form of collateralized reinsurance placements and the lack of market changing events in recent years.”

And, in the casualty area, adverse results in certain lines of business (such as automobile and trucking risk classes) have not yet led to a rise in reinsurance rates.

M&As to Continue

“With the desire for increased portfolio diversification and enhanced global presence in the reinsurance marketplace, interest in merger and acquisition (M&A) activity is expected to remain a very prevalent factor in the near-term reinsurance marketplace.”

If market competition continues, more companies under pressure to deliver underwriting profits may pursue acquisitions “to achieve broader scale and a wider footprint,” A.M. Best explained.

“Successful deals, however, will require effective plans for integration and a clear rationale and forward-looking strategy for the combined entity to flourish going forward.”

* A.M. Best analyzed the equity performance of the following 16 reinsurers: Alleghany, Arch Capital Group, Allied World Assurance, Aspen Insurance Holdings, AXIS Capital, Endurance Specialty, Everest Re, Greenlight Re, Hannover Re, Maiden Holdings, Munich Re, Renaissance Re, SCOR Re, Swiss Re, Validus Holdings, and XL Group.

[Editor’s note: A.M. Best issued a correction to its report on June 21. The article has been adjusted to reflect the fact that the publicly traded companies analyzed by A.M. Best together reported an average stock price decrease of 0.7 percent. SCOR and the other large reinsurers all experienced a drop in their stock prices in Q1 2016].

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