S&P predicts “worst is over” for reinsurers

Despite dire predictions for the global reinsurance sector in a report by A.M. Best earlier this week, rating agency Standard & Poor’s says reinsurers’ fate is not so bleak.”We’re nearing the point where we would stabilize our view of the reinsurance industry,” says Rob Jones, a managing director in S&P’s London office. “Prices, and perhaps more importantly terms and conditions, are holding up very well, and the market as a whole is earning money which will enable it to replenish, at least in part, the capital it has lost in recent years.”This comes despite a recent spate of reinsurer downgrades by S&P, which the agency says may be the bottoming-out point for the industry. In the last two months, S&P has lowered ratings on seven of the top 10 reinsurers, including world’s largest, Munich Re Group.The study notes that despite pricing increases, lack of investment returns, claims growth and inadequate reserving have plagued the industry. And recent results have proven disappointing for many companies, with S&P noting that while many companies were able to produce combined ratios below 100%, this was short of the low- to mid-90% range analysts were expecting.Nonetheless, S&P says the worst may be over, and many companies now have stable outlooks, despite an overall negative outlook on the entire sector.Among the signs of a turnaround, says Steve Dreyer of S&P in New York, are strong profits on an accident-year basis, exclusive of reserving issues. He adds that investment yields are showing signs of improvement, and corporate credit quality is strengthening. Lastly, the industry is moving away from proportional treaties making it less dependent on cedent fortunes.Despite these positive indicators, Jones notes that pricing in light of long-tail exposures remains a challenge. He also questions the fortitude of reinsurers to maintain the pricing discipline required for profitability. “We can already see some market softening in certain lines of business, and we’re concerned that large reinsurers may not deliver levels of long-term profitability to justify the ratings they previously carried.” Other concerns include persistent reserve inadequacy, risky investment portfolio concentration, and the question of recoverability of claims to retrocessionaires.