On the heels of a relatively ‘benign loss environment
OLDWICK, N.J., January 20, 2016—Stock prices for publicly-traded reinsurance companies, including the four large European reinsurers, sustained the position held at the end of second-quarter 2015 and, on a year-to-date basis, remained well above the overall market.
This was driven by the continued relatively benign loss environment and strong performance by the large four European companies, according to a new A.M. Best report focused on reinsurance companies’ stock performance in third-quarter 2015.
The Best’s Special Report, titled, “Myriad Challenges Continue To Test Reinsurers,” states that of the 18 publicly-traded global reinsurers followed for the report, only one has experienced negative stock price movement during the first three quarters of 2015 and four reinsurers experienced stock price gains of more than 20% over that time, including Hannover Re and SCOR, although only five companies in total have generated double-digit price changes.
Still, during the third quarter, the group of all public companies followed in this report experienced an average share price increase of 7.3%, which was down from the 8.1% average increase at the end of the second quarter.
Returns continue to show signs of stress
The report also notes that the current reinsurance market challenges likely result in returns continuing to show signs of stress. However, although the persisting challenges that the reinsurance industry faces remain formidable, those reinsurers that are truly global and benefit from diversification across geographic, product and distribution capabilities and remain steadfast in adhering to proven underwriting may be able to successfully navigate existing and oncoming headwinds.
During fourth-quarter 2015, the stock market rebounded, and although volatility remains a major concern, returns for some companies that were negative through mid-year have shown improvement, with the possibility existing that they could still rebound sufficiently to end the year with neutral or modestly positive returns.
With low investment yields and convergence capital continuing to exert pressures in the marketplace, risk-adjusted returns are likely to be squeezed over the near term.
At present, interest rates remain low despite the U.S. Federal Reserve’s recent increase of its target federal funds rate by 25 basis points. Combined with weakening demand for reinsurance from primary insurers seeking to better utilize their own excess capacity, and a stream of net prior year loss reserve redundancies flowing into income that should prove difficult to sustain, the challenge to maintain, not to mention, improve the level of recent earnings will be daunting.
The stellar performers will most likely be the companies that prove adept at leveraging strengths and expanding capabilities to meet the changing dynamics of the marketplace.
To access a copy of this special report, please visit here.
A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.