Ratings agency AM Best says global reinsurers face significant market challenges and has maintained a negative outlook for the industry.

Bermuda is one of the world’s largest reinsurance hubs and companies’ profitability has been squeezed by falling rates for the reinsurance coverage they sell and by low interest rates that limit the returns they can make on fixed-income investments.

In its commentary, AM Best said the negative outlook was “longer term than the typical 12 to 18 months”.

The New Jersey-based agency added that “companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better positioned to withstand the pressures in this type of operating environment and have greater ability to target profitable opportunities as they arise”.

Best said the challenges for the industry could translate into negative ratings pressures.

“While AM Best does not anticipate a significant number of negative outlooks or downgrades over the very near term, the market’s struggles at this point present significant longer term challenges for the industry,” the commentary read.

“Declining rates, broader terms and conditions, an unsustainable flow of net favourable loss reserve development, low investment yields and continued pressure from convergence capital are all negative factors that will adversely impact risk-adjusted returns over the longer term.”

Best expects to see more reinsurers merge in response to the market environment, “as balance sheet scale becomes an even more important attribute to retain and win new clients”.