Global reinsurers are being hit by a perfect storm of negative factors that include low investment returns, according to a report on the sector by rating agency Standard & Poor's (S&P).
According to S&P reinsurers' risk-adjusted profitability will continue to underperform recent history as investment returns remain relatively low, pricing keeps declining in almost all global lines and the benefit of reserve releases likely diminishes.
A number of mergers and acquisitions, such as RenaissanceRe and Platinum, as well as PartnerRe and Axis, have highlighted the limited options that many reinsurers face as cedants look for reinsurers with a global presence who can write tailored products.
S&P said that it was maintaining its negative outlook on the global reinsurance sector because it believes current market conditions mean credit quality in 2015 and 2016 will continue the downward trend that S&P identified in 2014.
The S&P report said: "We expect to see ongoing rate deterioration in the major reinsurance lines, coupled with rising ceding commissions. Therefore, we also expect to see underwriting performance continuing to tail off in 2015 and 2016. Unfortunately for the sector, it will not get any significant relief from investment income over that time frame, either. We expect interest rates to remain low in developed markets, where most reinsurers' investments are focused. Resurgent uncertainty about deflationary trends and eurozone stability following the Greek elections, falling oil prices, rising geopolitical tensions in the Middle East and Eastern Europe, and slowing economic growth in emerging markets all make for risky bets in today's market.
"There is some temptation to look for yield in alternative investments and some reinsurers have begun to increase their allocation to equities and other alternative investments, but only at the margins and in line with their stated risk tolerances. The current market uncertainty means pushing the limits further is unlikely, and it may lead to a flight to quality in many cases. We anticipate that yields for the sector will be flat in 2015 and increase in 2016 (see chart), beginning to somewhat offset the impact of premium pricing declines on companies' ROEs and returns on revenue."
S&P said that it foresees a competitive and difficult year ahead for the reinsurance sector and concludes with the following prediction: "In the meantime, for reinsurers, the game seems likely to remain eat or get eaten."
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