Best Reports Healthy Earnings ‘Mask Challenges’ for Global Reinsurers

September 9, 2010

A special report from A.M. Best concludes that “robust earnings reports mask challenges ahead for the global reinsurance industry: a convergence of market pressures, low interest rates and tightening financial and market regulations that could impact the industry’s capital.

“These global and multifaceted effects could be compounded by any significant catastrophe, including hurricanes that develop in what’s predicted to be an active season in the Atlantic basin.”

Best added that “prudent reinsurers are looking at every aspect of their operations—capital management, underwriting discipline, the size of their balance sheets and even their countries of domicile.”

Best highlighted the following areas as the focus for (re)insurers’ concerns:
— Insurers and reinsurers continue to prepare for Solvency II, the European Union’s new solvency directive, which, Best said it “believes will drive business to highly rated reinsurers.”

— The implications of Solvency II are expected to extend beyond the European Union to jurisdictions such as the United States, Switzerland and Bermuda, which will seek equivalency in their solvency regimes.

— Bermuda also faces U.S. government scrutiny of perceived tax advantages for subsidiaries of offshore companies—a perennial debate that could lead to limits on the tax deductibility of reinsurance premiums that U.S.-based, foreign-owned insurers’ pay to non-U.S. affiliates.

— Despite seemingly ripe conditions for consolidation—excess capital and a soft market—the bleak outlook for profitability has reinsurers across the board trading near or below book value, which constrains the market for mergers and acquisitions.

— New private equity investment in the sector has been slow, and the next market moving event may trigger an altered cycle of capital infusion marked by the use of “temporary capital” such as sidecars.

— Uncertainty over prospects for inflation or deflation is challenging insurers in their capital management to bet on one scenario or the other.

However, Best also indicated that “despite these challenges, the reinsurance industry remains well capitalized, and A.M. Best believes that underwriting discipline and the ability to maintain pricing integrity will likely be factors in reinsurers’ success at managing current market conditions.”

As far as the ratings outlook for the reinsurance industry is concerned Best said it “remains stable.” Best also indicated that it “continues to anticipate that the majority of reinsurers’ ratings will likely be affirmed over the next 12 to 18 months.”

The rating agency’s senior analysts will offer the company’s perspective on these issues and the current state of the reinsurance market at Les Rendez-Vous de Septembre in Monte Carlo, Monaco. The briefing will be held at the Fairmont Hotel, Grand Prix A, on 12 September at 10.15 a.m. To register for the briefing, please e-mail

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Source: A.M. Best

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