Reinsurers warned to expect downgrades as outlook turns gloomy

In a new report, S&P said that the tables seem to have turned for the global reinsurance sector. According to S&P, the tipping point came in early January when the ratings agency observed increasingly competitive behaviour between reinsurance companies. Rates for property catastrophe business in January were down by 10%-15% in Europe and 15%-25% in the US. "In our opinion, these competition-related risks have become the most prominent threat to the sector, usurping, for now at least, the macroeconomic risks we highlighted in September 2013," said S&P in the report.hideCapital levels in the global reinsurance sector are at a record high on the back of strong earnings in recent years and benign catastrophe loss activity in 2013. Shareholders' equity has grown by 10%-15% in 2013 alone. Inflows of alternative capital through sidecars and catastrophe bonds have also contributed to the cash pile. Reinsurers are seeing profits curtailed as demand for reinsurance is falling at a time of increasing supply. Meanwhile rising interest rates will not benefit reinsurers' results until 2015, S&P said in its Past The Tipping Point: Competition And Soft Pricing Could Lead To Rating Pressure For Global Reinsurers publication. "The oversupply of reinsurance, in tandem with reduced demand for it, is reshaping the marketplace," said S&P credit analyst Dennis Surge. "As we enter 2014, the changing marketplace is manifesting itself in stunted profitability." Following a run of good profits for reinsurers, S&P is now forecasting deterioration in the sector's operating performance in 2014. Lower profits seem 'unavoidable' given the rate decreases already seen this year and the assumption that rising interest rates will not bring relief until next year, it said. After eight years of stable outlooks, S&P now expects to see more negative sector rating actions than positive. As many as half of S&P's global reinsurance ratings could be exposed to these pressures, while consolidation or negative rating actions could result for a select few, the ratings agency said. Companies 'unable to navigate the difficult new landscape' are most exposed to the risk of negative rating actions, it added. "Companies without a defendable competitive position or those who are more aggressive in maintaining market share by competing on price or relaxing their underwriting discipline, are most at risk," it explained. 'Smaller catastrophe-heavy reinsurers' are highlighted as being under most pressure. Many global insurers are consolidating their reinsurance purchasing, streamlining reinsurance programmes and reducing the number of reinsurers used. They are also seeking more comprehensive and bespoke coverage, a trend that favours larger and more expert reinsurers, S&P said. Emerging markets are another possible growth avenue, but, as yet, reinsurers have not been able to find a profitable home for their excess capital. Many are giving 'appropriate lip service' to expansion into developing markets, but lagging insurance penetration and poor profitability prospects mean that most reinsurers are waiting until conditions appear more favourable, said S&P. Insurance analytics firm Litmus Analysis said any reinsurer downgrades by S&P based on future earnings potential rather than balance sheet strength would be controversial. "S&P is indicating the risk of downgrades driven simply by its view of a reinsurer's prospective earnings. It is one thing to issue a downgrade based on a balance sheet event such as a severe cat loss, asset write-down or reserve hike, quite another when it's based on the agency's judgement about weakening earnings potential," it said. S&P said it is concerned about further price weakness during this year as well as rate reductions at the most recent renewals. So strangely, as Litmus Analysis pointed out, any earnings-driven downgrades in 2014 could therefore occur well before any published figures from the reinsurer actually confirms such weakening.

Reinsurers warned to expect downgrades as outlook turns gloomy

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