S&P Says Global Reinsurance Outlook “Remains Negative”

May 30, 2003

In a report published this week Standard & Poor’s said that, “continued rate increases in the global reinsurance market have failed to stem the downward pressure on ratings and the market outlook remains negative for the sixth successive year”

As a result S&P warned that there may be more ratings downgrades than upgrades over the short to medium term. “Despite further price increases during the January 2003 renewal season, the market continues to suffer from a diminished quality of capital, reduced financial flexibility (defined as the ability to source capital relative to requirements), prior-year liabilities, the overhang of reinsurance recoverables, and the likelihood that many companies’ operating performance will fall short of expectations,” stated S&P credit analyst Stephen Searby.

The pressure on ratings continues despite the hard market conditions, said S&P. The report indicated that many reinsurers are having trouble taking advantage to of the situation “to rebuild and restructure their capital bases and put in place foundations to reduce future loss volatility.” S&P cited the “ease of entry for new players and increased competition in the market” as limiting the “ability of existing players to recover.”

S&P said the performance of the four largest reinsurance groups–Munich Re, Swiss Re, Employers Re, and General Re, who represent 32.3 percent of the market, “has been lackluster, with an average combined ratio of 127% and average ROR of negative 5% for 2000-2002.” This has created a “broad divergence in the fortunes of the industry.”

Searby explained that “Many established Bermuda-based operations have fared much better than the big groups over the same period, and these in turn have been outperformed by the more recently formed companies. The results indicate that the ability to write business opportunistically is a key competency for success, with those reinsurers that have been able to step in and out of business lines faring well.”

By contrast, the larger groups, which have tended to be more relationship based, have been slower to move out of unprofitable lines of business and have perhaps been impeded by longer lines of communication. “While the intent of senior management in large organizations can be crystal clear, communicating the need for change and making it happen can prove extremely challenging,” Searby indicated.

“As the challenges faced by the market continue, recovery remains the watchword,” the bulletin continued. “The industry must build on the hardening of rates and tightening of other terms and conditions that started in early 2001. However, while rates in many casualty classes continue to rise–including workers’ compensation, directors’ and officers’, and medical malpractice–there are already signs that certain sectors of the market have peaked.” Searby noted that these sectors included “U.S. property, global property-catastrophe, retrocession, and aviation lines.” This leaves the “sustainability of the improvement in terms and conditions subject to some conjecture.”

S&P said the report, entitled “Global Reinsurance 2003 Midyear Outlook: Negative Outlook Masks Divergent Fortunes,” was published on May 27, 2003, and is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit analysis system, at www.ratingsdirect.com. Alternatively, call one of Standard & Poor’s Ratings Desks: London (44) 20-7847-7400; Paris (33) 1-4420-6705; Frankfurt (49) 69-33-999-223; or Stockholm (46) 8-440-5916. Members of the media may contact the Press Office Hotline on (44) 20-7826-3605 or via media_europe@standardandpoors.com.
For a copy of the full report, please e-mail sarah.

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