Ratings firm A.M. Best said it is maintaining its 2018 outlook for the U.S. property/casualty reinsurance sector at negative, citing the “pronounced pressure on U.S. property catastrophe rates as the alternative capital market presence in the property catastrophe space continues to grow.”
Companies’ earnings going into third-quarter 2017 already had been depressed compared with historical trends, according to the Best’s Briefing titled “Market Segment Outlook: U.S. Property/Casualty Reinsurance.” 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.”
A.M. Best analysts say that the negative impact of catastrophe losses on underwriting earnings in 2017 has “further eroded the segment’s historical earnings,” although they acknowledge that the market’s capacity to absorb these events has proven resilient and carrier balance sheets remain solid.
But A.M. Best analysts said they are 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. In addition, they believe that 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 U.S. 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,” the rating agency said in a statement.
There will be opportunities for organic growth and improved utilization of excess capacity in improvement in the U.S. and global economy, as well as future economic benefits stemming from U.S. federal tax reform, according to A.M. Best, which added that this should aid in improved risk pricing.
A.M. Best said it also expects to see global reinsurers expand their U.S. legal entities by “growing those balance sheets and retaining more business onshore as a result of the upcoming tax reform.”
A.M. Best also has a negative outlook on the global reinsurance industry.
A.M. Best estimates that the combined ratio and return on equity for the U.S. 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 U.S. reinsurance market environment, are the main drivers behind the negative outlook on the sector.”
In A.M. 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.”
The reinsurance outlook comes a day after A.M. Best announced it had boosted its outlook on the property casualty commercial lines segment from negative to stable for 2018. That uptick is the first by A.M. Best for commercial lines in seven years. A.M. Best said the outlook has improved due “an embedded change in the sophistication of the segment’s pricing and underwriting infrastructure and the segment’s resilience amid a variety of macroeconomic and insurance market issues in recent years.”