Best Maintains Stable Outlook on Global Non-Life Reinsurance Industry

February 23, 2010

For the fourth consecutive year, A.M. Best Co. is maintaining a stable outlook for the global non-life reinsurance industry. The current outlook implies that the “majority of 2010 reinsurer rating actions are likely to be affirmations, with only a modest number of anticipated rating or outlook changes,” the bulletin said.

Best indicated that this outlook reflects its view that the “reinsurance segment maintains a strong capitalization position overall. Moreover, 2009 was a strong underwriting year, and the investment market recovery enabled the segment to regain capacity that was lost in 2008.”

As a result, Best concluded that, “considering the turmoil that has occurred within the financial services industry, the global reinsurance sector, which includes the majority of Bermuda market companies, has weathered a financial storm in good standing.”

However, the rating agency warned that there are certain factors that “could change the global reinsurance sector outlook to negative.” These include “ineffective management of capital in both the short and long term; further erosion in pricing, with a particular focus on long-tail casualty business,” as well as the “effect that ramped inflation may have on loss reserves.”

Best noted that from an earnings perspective it believes that “2010 is likely to be a positive operating year, subject to catastrophe experience.” Over the mid-to-longer-term period Best indicated that it “believes that global reinsurance earnings will come under pressure due to a reduction in loss reserve releases and that, as a result, calendar year results will be more reflective of the recent pricing environment. Additionally, the low interest rate environment, combined with reinsurers’ re-allocation into more conservative investments, will further erode return measures.”

Best concluded with a statement that it “believes that for reinsurers to manage current market conditions, underwriting discipline and the ability to maintain pricing integrity likely will be success factors. However, the combination of a return of higher catastrophe losses and the reduction of favorable prior year loss reserve development could swing the pendulum toward lower margins compared with the positive results reported for three of the past four years.”

Source: A.M. Best – www.ambest.com

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