S&P Sees Stability in Reinsurers’ Ratings

September 9, 2003

Standard & Poor’s has issued a report entitled “Global Reinsurance: Calmer Waters Ahead?” which indicates that the outlook for reinsurers’ ratings “is now nearing stability.”

The rating agency noted that the “downgrades in the global reinsurance market over the past few years reflect the market’s failure to establish a sustainable level of profitability.”

In plain language it appears that S&P has concluded that in most cases the ratings are about as low as they will go, and have “largely crystallized the negative outlook on the industry in recent years.” Even a return to profitability by most reinsurers this year is expected to be somewhat disappointing, as they still have to contend with low interest rates and “the impact of other issues such as growing asbestos-related liabilities and increased exposure to impaired reinsurance recoverables.”

“Profits are likely to be constrained in 2003, and given Standard & Poor’s expectation that the hard market has only a couple of years left to run before the insurance cycle turns, the industry’s leading players have fallen behind the curve,” stated S&P credit analyst Stephen Searby.

S&P noted “that the industry combined ratio was 105.3% in 2002. Although this represented a marked improvement on the 128.4% reported in 2001, the bottom-line result was still worse than the previous year–2000–when the industry reported a combined ratio of 113.5%. Furthermore, the financial performances of the big four reinsurance groups–Munich Re, Swiss Re, Employers Re, and General Re–have not been immune to the impact of poor pricing over the past few years, with an average combined ratio for 2000-2002 of 127%.”

In contrast the “smaller, younger players” have been doing better. “In Bermuda, for example, the average combined ratio for the years 2000-2002 was 108%,” said S&P. “The divergent fortunes of the old guard and the younger generation of reinsurers have led Standard & Poor’s to question whether the old reinsurance model, based on global diversity and financial muscle, is the right paradigm in a marketplace where the rules are changing,” Searby commented.

To a varying extent, the larger groups have been hampered by longer lines of communication, long-tail lines of business, and a focus on client-oriented proportional business. “The large groups are suffering from structural issues that will take some time to fix. Increasingly, therefore, the question must be asked: Is big still beautiful?” Searby continued.

S&P did note that a “number of improvements have been realized in the market,” notably reduced risk exposure and average price increases of around 60 percent. Better underwriting standards and more restrictive terms and conditions have helped as well. The improvements are expected to begin having a positive impact on earnings this year and an even greater one in 2004.

“Although improved profitability is pretty much assured for 2003 and 2004–albeit at a lower level than previously expected–the sustainability of the improvement in pricing and other terms and conditions is still subject to some conjecture,” Searby noted. “Companies with no legacy liabilities and abundant capital may rightly believe that this is a good time to competitively assert themselves. Since they do not have to make up for the sins of their past, they may be able to do so profitably. This could force the established players to compete more aggressively, thereby shortening the hard market.” he added that “recent rating actions mean that such issues have now been factored into ratings.”

S&P noted that the article, published Sept. 8, “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.
The commentary article also appears in Standard & Poor’s Global Reinsurance Highlights 2003. For a free copy, e-mail Sarah Thomas at sarah_thomas@standardandpoors.com.”

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