Behind AM Best's negative reinsurance outlook

AM Best announced this week that it is taking a negative outlook on the reinsurance sector due to tough market challenges.

GR spoke to AM Best EMEA analytics managing director Stefan Holzberger to find out more.

In a market note, the rating agency said: “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.”

Holzberger said: “What we’re seeing is the reinsurance sector approaching an inflection point.

“So the fairly strong results posted in 2012 and 2013 may very well have reached a peak. From here, based on a whole series of market forces, we will expect to see a decline in profitability, growth and risk-adjusted returns.”

The rating agency made its decision to take a negative outlook based on factors such as falling rates, low investment yield and continued pressure on traditional reinsurers from convergence capital.

In its market note, AM Best said that it had tried to be balanced, but that “it remains difficult to stray from the simple fact that compressed investment yields, lower underwriting margins and

The rating agency is also taking a longer term view of the issue than its usual 12-18 months.

Holzberger said: “I would say that are looking at a two-to-three-year time period. The reason we are pushing that out is that balance sheet strength is strong for the industry, meaning they can withstand some negative market forces for that period before they start to see a meaningful erosion of risk adjusted capitalisation.”

The rating agency’s note added that companies with diverse business portfolios, advanced distribution and broad geographic scope were in the best position to handle the underlying market problems.