Wall Street Is Negative on Reinsurers

August 17, 2001

Neither Standard & Poor’s Financial Services Ratings Group nor investment bank Morgan Stanley is bullish on the reinsurance industry these days.

S&P issued a report affirming its “negative outlook on the European reinsurance market,” and warned that it’s likely that some company’s financial strength ratings will be downgraded.

Associate Director Stephen Searby noted that despite a “9% growth in premium volumes in 2000” rate increases were “patchy” and did not result in an overall improvement in the industry’s operating performance. He cited the ongoing loses from the December 1999 windstorms, additional long-tail liabilities, and a deterioration in investment performance as the primary reasons for the poor results.

The S&P report wasn’t optimistic on this year’s results either, predicting a that a technical return to profitability probably won’t occur “until 2002 at the earliest,” and Searby warned that reserve levels could prove insufficient “to cover any significant loss event or adverse reserve development on earlier years.”

Morgan Stanley insurance analyst Espen Nordhaus took an even more pessimistic view warning that there would be failures in the industry as claims and damage awards continue to increase while capital investments remain stagnant or decline.

The problem is particularly acute for small and and medium sized reinsurers, many of whom are “painfully under-reserved” according to Morgan Stanley, and who cannot call on a broad shareholder base to replenish their capital. Another weather event like 1999’s storms or a similar series of catastrophe losses could trigger the financial failure of a number of reinsurers.

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