Ratings agencies warn reinsurers on potential downgrades in 2017
Ratings agencies see the operating environment for reinsurers deteriorating in 2017 which could lead to negative ratings actions particularly for smaller players.
AM Best, Fitch and Moody’s all hold a negative outlook for the global reinsurance sector.
The strain on profitability is evident in reduced risk-adjusted returns with market headwinds at this point, presenting significant longer-term challenges, AM Best stated in its December briefing.
AM Best sees continued market challenges eventually translating into negative rating pressures.
Negative factors such as low rates, broader terms and conditions, the unsustainable flow of net favourable loss development and anaemic investment yields will continue to adversely impact risk-adjusted returns for reinsurers.
In AM Best’s view, companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better-positioned to withstand the pressures in this difficult operating environment and have greater ability to target profitable opportunities as they arise.
Moody’s expects underwriting profitability in the reinsurance sector to continue to decline, albeit more slowly than in previous years, due to lower price reductions, it said in a December statement.
Fitch warned that further profit declines in underwriting and investments could result in negative rating actions. The agency’s base case forecast assumes major losses returning to the long-term historical average, highlighting the current sensitivity of the sector’s earnings due to thinning underwriting margins.
Profits at several companies have diminished notably since 2012 to levels that could, if sustained, lower their respective financial strength. It is highly likely that a further deterioration in the profit metrics of those companies could result in rating downgrades, or their ratings being moved to ‘negative outlooks’.
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