Rating agencies bearish on reinsurance outlook (October 01, 2002)

U.S. rating agencies Moody’s Investors Service and Fitch Ratings have issued negative outlook reports for the global reinsurance sector, citing limited medium to long-term earnings growth potential despite the substantial rate increases introduced by companies during the course of this year. A slowdown in growth may spur a new round of mergers and acquisitions within the global reinsurance sector, the rating agencies say.

Moody’s notes that, although rising prices and tighter underwriting terms have improved reinsurers’ financial results in nearly all lines of business, the sector’s growth potential will likely be hindered by adverse reserve developments resulting from past years of inadequate pricing, new claims exposures emerging through asbestos, and rising loss estimates from the World Trade Center (WTC) attacks. Low investment returns will also likely limit the growth potential of reinsurers, the rating agency says. As a result, Moody’s predicts that there will probably be more company financial downgrades than upgrades over the next 12-18 months.

Although the hard market is helping reinsurers, it may only last through to the January 2003 treaty renewals, Moody’s observes. “Beyond that point, it is difficult to see an impetus for continued large price increases, barring a substantial catastrophe, although price stability should persist for at least another renewal season or two,” comments Ted Collins, managing director of property and casualty reinsurance at Moody’s.

Fitch also believes that the next 12-18 months will see more financial downgrades of companies than upgrades. The rating agency cites the same negative market factors indicated above, noting that the upward rate adjustments implemented this year by reinsurers has simply put the sector back to the correct “technical level” of breakeven on underwriting. “Fitch does not believe the reinsurance business has improved to the point where the broader market can earn reasonable returns. Based on these considerations, Fitch is maintaining a negative outlook on the U.S. and global reinsurance markets.”

Although upward price momentum will likely continue through to 2003 treaty renewals, the rating agency believes that renewed competition will limit the extent and longevity of the hard market.

A report issued by reinsurance broker Guy Carpenter suggests last year’s dismal financial returns for Canadian reinsurers have led to a sharp 44.1% increase in reinsurance premiums in 2002. The brokerage notes that, according to Swiss Re figures, rates rose this year for the third year in a row, although 2000 saw an increase of only 3.4%, followed by 9.3% in 2001. Last year’s financial returns for reinsurers provided ample incentive for hardening, with an industry combined ratio of 119.1%, despite the lack of a major natural catastrophe loss in Canada. “Rate increases are expected to continue into 2003,” the report suggests, adding, “multi-year programs are expected to be eliminated entirely from the marketplace in 2003.”