S&P Report: Reinsurers’ “True Test Still to Come”

January 13, 2005

Standard & Poor’s Ratings Services has published its biannual report card covering the world’s largest reinsurers. According to the report, reinsurers have held their resolve and have kept price cuts to sensible levels at the Jan. 1 renewal. But it warns that “the true test of this resolve will not come until the end of the year.”

“Early evidence from the Jan. 1 treaty renewals is that while reinsurance premium rates are still softening, the declines remain orderly–generally in the region of 5 to 15 percent for loss-free accounts,” noted S&P credit analyst Stephen Searby. “For loss-affected accounts and Caribbean risks, generally rate rises of up to 35 percent have been achieved, but this is only a small subset of the industry.”

To some extent S&P discounted the effect of current events – the U.S. hurricanes, New York Attorney General Eliot Spitzer’s investigations into issues of brokerage commissions and financial reinsurance, and the adverse reserve development in the U.S. P/C business – on the market. It said “the industry’s biggest risk remains the most predictable: namely, the cyclical nature of the market.”

“Periods of strong profitability have historically been followed by cyclical downswings in pricing to often uneconomic levels,” Searby continued. “Despite the current discipline, this danger remains.” The real test of the industry’s resolve will therefore not occur until late 2005. “By and large, pricing still remains above economic levels, albeit lower than 12 months ago,” he added.

Searby also indicated that “some further slippage in prices is likely, but for the time being the market is behaving in a relatively disciplined manner compared with the same stage in previous cycles. The critical issue is whether further declines can be halted in 2006 when prices, on their current downward trajectory, will begin to test the rational levels of returns.”

The report, “Industry Report Card: Global Reinsurance,” is available to subscribers of RatingsDirect, S1P’s Web-based credit analysis system, at www.ratingsdirect.com. Ratings information can also be found on Standard & Poor’s public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find Ratings, then Credit Ratings Search.

Alternatively, call one of the following Standard & Poor’s numbers: London Ratings Desk (44) 20-7176-7400; London Press Office Hotline (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5916; or Moscow (7) 095-783-4017.

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