The U.S. and Bermuda reinsurance sector has its challenges, particularly when it comes to living up to previous years' returns on equity for investors, but ratings agency A.M. Best is maintaining its stable outlook due to reinsurers' strong capitalization and enterprise risk management practices, as well as a stable pricing environment.
A.M. Best notes that in 2009, its U.S. and Bermuda reinsurance market composite posted a 16 percent ROE. In 2006, it posted a 19 percent ROE. "At that time," A.M. Best comments in its latest Review/Preview analysis, "most market participants and observers knew that 2006 was likely the high- water mark for property and casualty returns. What most didn't know then was that by the end of 2012, the U.S. and Bermuda reinsurance market would struggle to post the round number of 10 percent and would be challenged to post double-digit returns over the intermediate term."
The ratings agency says it expects the segment to hit that 10 percent mark for 2012, noting that the figure seems relatively attractive in the post-financial-crisis world.
But A.M. Best also says the reinsurance sector "has been out of favor for some time with investors," with uncertainty over interest rates and inflation casting even more doubt among investors.
From an underwriting standpoint, A.M. Best expects pricing to continue to improve for the sector. "Property classes generally have been the most desirable from a pricing perspective over the past several years," says the analysis. "The relative attractiveness varies somewhat by region, but Florida generally has been reported to be the most attractive in terms of risk-adjusted rate on line." A.M. Best adds that the Northeast may see upward momentum as well due to Superstorm Sandy.
On the casualty side, A.M. Best says pricing has moved more slowly, "and it is still clear that thus far, the pricing improvements are not sufficient to compensate for erosion in investment yield."
Consequently, the ratings agency says reinsurers are finding property and short-tailed opportunities more attractive at the moment.
In general, A.M. Best acknowledges the "turbulent global macroeconomic conditions" with which reinsurers must contend, but the ratings agency says, "A disciplined underwriting posture has enabled reinsurers to produce reasonable profits from underwriting activities, helping to mitigate the continuing deterioration in investment earnings. Following the devastating catastrophe losses in 2011, reinsurers rebounded quickly to produce an average ROE in the low double-digit range through nine months of 2012. A.M. Best expects that even with consideration for the catastrophe loss that occurred in the fourth quarter last year, reinsurers still are well-positioned to put forward an acceptable level of underwriting and overall profit for the full year."
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