S&P Comments on Reinsurer’s Diversification Efforts

September 12, 2007

In a new report, issued as one of several in conjunction with the annual Reinsurance Rendezvous in Monte Carlo, Standard & Poor’s Ratings Services examines the efforts of global reinsurers to diversify their portfolios.

The report titled “Reinsurer Diversification: A Means To An End, Not An End In Itself,” notes that such initiatives are often a useful by-product of a well-constructed portfolio of risks built around their core competencies.” However, S&P cautions, “the pursuit of diversification as an end in itself is more likely to be detrimental than beneficial to an entity’s long-term financial strength.”

S&P indicated that, while recent events have “increased the visibility of diversification,” they haven’t changed its relative importance. “When not pursued aggressively as an end itself, well-managed diversification has always been–and will remain–an important factor of a reinsurer’s long-term financial strength,” said S&P.

In essence diversification is nothing new, but (re)insurers and their stakeholders have recently been focusing more heavily on diversifying their portfolios for several reasons, which S&P cited as follows:
— The increased incidence of natural catastrophes.
— A growing body of evidence about the adverse effects of global warming.
— Improved sophistication of economic capital modeling.
— Regulatory developments—most notably that of Solvency II in Europe.

S&P also acknowledged that “quantification of a (limited) diversification credit within our updated risk-based capital model” has fueled the perception that S&P is “now placing more emphasis on diversification within its analysis. This is not the case. In fact, for Standard & Poor’s to do so would likely encourage reinsurers to pursue diversification as an end in itself, which could well prove harmful to a reinsurer’s credit standing over the long term.”

The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at: www.ratingsdirect.com.

If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to: research_request@standardandpoors.com.

Ratings information can also be found on Standard & Poor’s public Web site at: www.standardandpoors.com; select Ratings in the left navigation bar, then Credit Ratings Search. Alternatively, call one of the following Standard & Poor’s numbers: Client Support Europe (44) 20-7176-7176; London Press Office Hotline (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4017.

Source: Standard & Poor’s

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