Best Says 2009 Global Non-Life Reinsurance Outlook Remains Stable

March 4, 2009

A.M. Best Co. said it is “maintaining a stable outlook in 2009 for the global reinsurance sector for the third consecutive year. This current outlook implies that the majority of 2009 reinsurer rating actions are likely to be affirmations with only a modest number of anticipated rating or outlook changes.”

Best cited the following factors in support of its decision:
— sound underlying operating earnings generated over the most recent timeframe;
— assessment that management teams have demonstrated underwriting discipline,
— and our view that the risk-adjusted capital adequacy of the segment is currently adequate relative to existing ratings with sufficient cushion to absorb a normal level of catastrophic activity.

Best noted that “on a total return basis, 2008 margins were compressed largely as the result of drastically rising credit spreads and severely depressed asset valuations. From an underwriting perspective, despite one of the worst catastrophe years on record, the
majority of reinsurers generated combined ratios below 100 percent, demonstrating strong underwriting discipline.

“Factors that could lead to an outlook change from stable to negative for the segment include the segment’s ability to maintain current pricing discipline and to manage aggregate exposures, as well as the potential for further drains on capital should the negative investment trend continue or worsen.”

The analysis also bolstered the sens that traditional reinsurance has received a lift from the current economic crisis. Best said that “a playing field of underwriting opportunities perhaps has shifted back to traditional reinsurance underwriting, given the removal of capacity from the market as a result of the confluence of a global capital market crisis and severe catastrophe losses.

“Additionally, financial flexibility has been adversely affected by a near-freeze in capital markets, which has led to an exceptionally high cost of capital. The issuance of insurance linked securitizations has also declined.”

As a result Best said it “expects that the demand for reinsurance should increase in 2009, largely for capital relief purposes. More than ever in 2009 the challenge will be for reinsurers to ensure that business is written at acceptable rates and to write business that can be supported by their respective balance sheets.”

Turning to the increasing importance of Enterprise Risk Management (ERM), Best noted that the concept “was firmly tested in 2008 as a combination of the worst global economic crisis of a lifetime coupled with significant catastrophe losses severely tested the enterprise-risk frameworks recently established by companies in the reinsurance sector.”

Somewhat reassuringly, Best indicated that “in large part natural catastrophe losses were contained within probable maximum loss estimates, despite several carriers increasing loss estimates for Hurricane Ike during the fourth quarter. Reinsurers did get a break from higher client retentions and the fact that, absent the Ike and Gustav losses, record catastrophe loss experience within the U.S. mostly comprised a large number of smaller events that were contained at the primary level.”

Best described the “magnitude of investment losses” as a “surprise to many, as several reinsurance companies experienced a pronounced reduction in capitalization. Additionally, although the credit crunch began at the onset of the subprime meltdown in August of 2007, it did not prevent many reinsurers undertaking share buyback programs.

“With the benefit of hindsight, it appears that some management teams did not consider the opportunity cost of managing short-term share price values relative to the turn in the market cycle that accelerated in the latter part of 2008.

“The over-arching issue facing reinsurers is that the wells are dryer going into 2009, as capital is not expected to flow into the industry in a meaningful way, even if a considerable industry-wide catastrophe where to occur. This represents a different position compared with other cycle inflection points, for example, following the World Trade Center tragedy and Hurricane Katrina when new capital poured into the segment.”

In conclusion, Best said the “January 2009 renewals highlighted cedants’ resistance to price increases with meaningful rate hikes confined mostly to peak-zone catastrophe risks. It is expected that catastrophe-exposed property risks will continue to experience pricing increases with casualty accounts turning at a slower rate.”

Best also pointed out that the “renewals through July 1 will likely be impacted by the changes to the Florida Hurricane Catastrophe Fund, which should increase the demand for reinsurance.

“While there are expected to be underwriting opportunities in 2009, reinsurers must be careful when deploying capital due to constrained financial flexibility given the present hurdles for carriers wishing to access capital markets at a reasonable price.

“However, for carriers that have successfully managed capital and have strong ERM practices, operating results for 2009 are expected to be favorable, providing opportunities to replenish capital that was lost in 2008.”

Source: A.M. Best – www.ambest.com

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