Reinsurance shares suffer, as prices soften & glut of capital bites

Reinsurance company stocks traded well below the overall market during the third-quarter of 2014, as excess capital, the consistent flow of alternative capital and reduced reinsurance demand heaped pressure onto reinsurers, according to A.M. Best.

A recent report from the rating agency titled ‘Global Re Stocks Underperform As Cat Prices Decline,’ notes that only one stock outperformed the overall market in Q3 2014, with only 10 (out of the 20 publicly traded reinsurers studied) seeing positive performance so far this year.

Part of A.M. Best’s report states; “Despite the low level of losses and continued favorable reserve releases from prior years, pricing pressures for catastrophe (cat) business continued to overshadow the prospects of this sector during the third quarter.”

The majority of reinsurers have noted a significant reduction in reinsurance business written, most notably in the property and catastrophe sector, highlighting that in the current market environment, disciplined underwriting practice is of the utmost importance.

Certain reinsurance companies witnessed catastrophe price reductions of as much as 20% during the first nine-months of 2014, A.M. Best attributes this to “the ongoing lack of market-changing losses, as well as increased retentions by ceding companies and the inflow of capital (reinsurance capacity) from the capital markets, largely in the form insurance-linked securities (ILS).”

Despite this rather negative outlook for the current market and going into 2015, for which the report predicts much of the same, it’s not all doom and gloom for the sector. Reinsurers combined ratios and return on equity (ROEs) figures, for the most part, remains solid so far during 2014.

A chart provided with the study shows that out of the 22 selected reinsurers the average combined ratio comes in at 87.4% so far in 2014, a slight variation on 2013’s 86.8% and an improvement on 2012’s 93.1%.

So far in 2014 the A.M. Best report reveals average annualized ROEs of 10.9%, compared to 12.4% in 2013 and 10.6% in 2012.

So despite continued price softening and some tightening on terms and conditions, combined ratios and ROEs for the reinsurance sector appear to be benefiting from benign catastrophe seasons, amplifying the markets consistent resilience during testing times, when compared to other business lines.

However, A.M. Best predicts that some negative fluctuation with firms combined ratios and ROEs could be round the corner in 2015; “Lower ROEs and an uptick in combined ratios are possible for 2015 as commission expenses increase further and premiums keep declining, particularly if pricing also continues to deteriorate on the primary side of the business.”

An overwhelming number of reinsurance market outlooks predict the influx of alternative capital to continue into 2015 and beyond, this coupled with an absence of major losses signals even more testing times for reinsurers globally.

With prior year positive reserves expected to shrink, reducing reinsurers performance in the coming years, while at the same time expense control and efficiency grows in importance, the lean business model of ILS looks increasingly attractive and likely to grow.

You can find the full report from A.M. Best via its website here.