Insurance and reinsurance firms are becoming even more pessimistic about their ability to maintain recent levels of return on equity (ROE), as the challenging environment impacts profitability causing re/insurers to reduce their ROE targets, according to a recent survey.
A.M. Best’s winter survey of insurance and reinsurance players, which saw 400 respondents give a range of views on capital management, asset allocation and other topics, shows that re/insurers continue to reduce their targets for ROE, as they become less confident in their ability to maintain them.
In the latest survey A.M. Best says that around 30% of respondents believe an ROE of 5% to 7% was reasonable, with around the same number targeting slightly higher at 8% to 10%. In aggregate, 74% of respondents are now targeting an ROE of 10% or lower, compared to 49% who were targeting that level a year earlier.
A.M. Best notes that this shift in sentiment outlook is significant, and the rating agency believes it is tied to the interest rate environment and the challenges that poses for insurers and reinsurers asset returns.
A.M. Best also notes that publicly traded companies are becoming more gloomy about their prospects to perform, with 41% now forecasting at ROE of 10% or lower, compared to just 8% in 2014.
In a world where insurance and reinsurance companies may be finding competition higher, new entrants eating into their market, new capital and new structures competing with them on price and efficiency, lower forecast ROE’s may get even lower still when pricing levels really show up in results.
One of the outcomes of lower ROE forecasts is that both insurers and reinsurers are trying to add more return on the asset side, looking to broaden their portfolio into alternatives or better yielding traditional asset classes.
A.M. Best’s survey notes a consistent move by P&C players into alternatives, where hedge funds, private equity and fixed income type exposures seem the most popular to insurers and reinsurers, perhaps due to a lack of understanding of other alternative assets.
With lower ROE’s expected and predicted by the companies themselves, higher risk on the asset side and at the same time rates in P&C lines of insurance and reinsurance slowing or declining, it looks ever more important to control the expense ratio.
All of these factors continue to point towards some difficulty for some players when catastrophe and weather losses spike back up nearer to long-term normal levels. ROE’s could turn negative very quickly if that happens, which makes becoming more efficient and controlling costs increasingly important.