Credit agencies fear stormy seas ahead for reinsurers

In a report released yesterday Standard & Poor's (S&P) said that it believes the reinsurance sector once again faces a test of its resolve, and should prepare for the expected high natural catastrophe losses in 2010. Meanwhile rival credit rating agency Moody’s has maintained its negative outlook on the reinsurance sector, and believes that credit fundamentals for reinsurers are more likely to weaken rather than improve over the next 12 to 18 months. In its opinion, the sector continues to be challenged by soft pricing, overcapacity, low investment yields, and weak equity market valuations. However, it should be noted that this view is already reflected in the current ratings and outlooks assigned to individual firms, Moody's said.hideAccording to the S&P report the 2010 earnings outlook for the reinsurance sector stands in stark contrast to the industry's positive experience in 2009. And global reinsurers will need the capacity built up during 2009 to handle high catastrophe losses in 2010, S&P added. "Catastrophe losses during the first half of 2010 were at a 10-year high, but capacity remained abundant, allowing an acceleration of the erosion of underwriting margins," said S&P's credit analyst Mark Coleman. "After the shocks of 2008, the industry rebuilt its capacity and confidence during 2009. But the first six months of 2010 have seen insured catastrophe losses that have reportedly exceeded $20bn–equivalent to the losses incurred during the whole of 2009." S&P's estimates that more than half of the reinsurance sector's annual catastrophe budget had already been eroded before the onset of the US hurricane season, and most weather forecasters predict above-average storm activity in 2010. But, Moody's said that without a transformational $40 to $50 billion catastrophic event, or series of events, it believes 'the path of least resistance' will lead to yet lower pricing. During 2009, the strong recovery in the capital markets and low catastrophe losses combined to increase the aggregate book value of the top 40 global reinsurers by 28% over 2008 levels, to approximately $365bn at the 2009 year end. Despite elevated catastrophe losses and the decision by many of these firms to buy back stock during the first half of 2010, equity positions for these firms have continued to increase during the second quarter of 2010. They currently stands at approximately $385bn. At the same time, the demand side remains weak, reflecting slow global growth rates. Of the non-life insurers surveyed, most do not plan to increase their reinsurance budgets during 2011, Moody's said. “With premium volumes drifting lower and equity positions holding steady, we believe the industry has too much capacity, which is likely to manifest in increased price competition going forward,” the company explained. “While property pricing remains adequate, rate adequacy for casualty lines appears to be tenuous at best, and could be deficient for some segments,” it added.

Credit agencies fear stormy seas ahead for reinsurers

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