AM Best has kept its outlook unchanged at negative, while Fitch has upgraded its outlook to stable

Ratings agencies Fitch and AM Best have delivered differing outlooks for the reinsurance industry.

Giving press conferences at the Monte Carlo Rendez-Vous, senior directors at Fitch, which rated the outlook stable, and AM Best, which rated it negative, explained their respective decisions.

For AM Best, senior director Robert DeRose said that excess capacity is the main driver in its unchanged negative rating.

DeRose said the ratings agency debated “quite aggressively” whether to change the outlook for the reinsurance market, but in the middle of this year decided any optimism the hurricane events of 2017 would harden the market had been quashed.

He said: “We followed January renewals through to mid-year renewals and to say the least we were quite disappointed with the way pricing terms and conditions developed following those events.

“Looking forward in terms of what the market is going to deliver in terms of returns, we just don’t see a significant enough of an improvement to change our mid-term view of the market outlook. So we are keeping it at negative.”

He went on to say that competition continues to be intense, and that was one of the reasons why pricing has not developed as anticipated, despite heavy catastrophe losses last year.

“The increasing interest in third party capital remains,” he added. “Obviously, there is a lot going on around third party capital.

“Earnings did stabilise, but they certainly do remain under pressure.

“Favourable reserve development is still a very significant component of the reported results and excess capacity is the key reason for this.”

DeRose did recognise that capital had had a stabilising effect on rates, but he said this wasn’t significant enough.

He blamed excess capital for restricting improvements in pricing off the back of the hurricanes last year, and said that the potential for increases in inflation was another negative affecting the rating. This was particularly the case in the US as a result of rising interest rates.

But Fitch has taken a different outlook on the same market. The rating agency has rated the outlook at negative for the last five years, but this year separated from AM Best with a stable rating.

“It might seem a strange time to make that change given the significant cat losses that we saw last year, but there are a number of factors behind why we made that decision,” said Fitch director Graham Coutts.

“Importantly, we believe there has been a secular shift over the years in the industry and that while the returns you can receive now from reinsurance business are fundamentally lower than they might have been 10 years ago, we do believe the returns in the market are still viable.”

Coutts said there is now a “new normal” in the market.

While this may mean lower returns, he said it would also mean lower volatility.

He said it was the extra capacity in the market that had created this new normal, and that it could have a positive effect on the market.

He added: “From what we saw after the cat losses of 2017 the balance sheets held up very well. One of the reasons for that we think is due to the ILS market and alternative capital.

“Having this extra capacity in the market has put more pressure on pricing, so it has fundamentally reduced the returns available to the traditional insurance market.

“But it has also had the effect of improving the ability of the traditional reinsurers to manage their balance sheet better, so they can transfer some of the risk to the capital markets.”

While AM Best disagreed on the effect extra capacity was having on the overall market, both agencies gave a stable outlook in their ratings outlook for reinsurers, in no small part due to their continued strong capitalisation and excess capacity to deploy.

DeRose said that for the vast majority of reinsurers rated through AM Best the outlook was stable, and agreed that balance sheets were largely strong as a result of the capital entering the market.