AM Best downgrades reinsurance outlook to negative

AM Best has become the final rating agency to revise its outlook on the global reinsurance sector to negative, citing ongoing market challenges which will hinder the potential for positive rating outlooks or upgrades.

All four of the major agencies now have a negative outlook; Standard & Poor’s being the first to revise in January.

“It has become even more apparent that as compression continues bearing down on investment yields and underwriting margins, this strain on profitability will ultimately place a drag on financial strength.

“At this point AM Best’s view is longer term than our typical 12-18 months. While AM Best does not anticipate a significant number of negative outlooks or downgrades over the very near term, the market headwinds at this point present significant longer term challenges for the industry,” says the rating agency.

In settling on the outlook, the rating agency said that it had tried to look at a broad range of measures and other trends, including the traditional market’s increased use of capital markets capacity to help optimise results and the net probable maximum loss (PML) for peak zones as a percentage of capital.

“Yet it remains difficult to stray from the simple fact that compressed investment yields, lower underwriting margins and broader terms and conditions place a strain on profitability, and that reinsurers are being paid less and less to bear risk. Broadly speaking, rated balance sheets are currently well capitalised and capable of withstanding various stress scenarios.

“However, over time this strength may erode as earnings come under increased pressure and grow more volatile, favourable reserve development wanes and the ability to earn back losses following events is prolonged by the instantaneous inflow of alternative capacity. All of these issues reflect increased concern 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.”