The ratings outlook for the global reinsurance market remains negative, despite expectations that the market's 2003 results will show a return to underwriting profitability, said a report from Standard & Poor's (S&P).
“The reinsurance industry is expected to report an overall technical profit for year-end 2003, even after the impact of prior-year losses. Meanwhile, continued rate increases at the 2004 January renewal augurs well for an improving accident year for the market in 2004-2005,” said S&P's credit analyst Stephen Searby.
“Nevertheless, negative pressures remain on some ratings in the sector. The market outlook, negative now for the seventh consecutive year, therefore reflects an expectation that more ratings will be lowered than raised over the next six months, albeit at a much slower rate than experienced during 2002-2003.”
S&P said the most important negative influences on the market were: diverging fortunes between the companies; the impact of the flight to quality and the associated problem of rating-related triggers for weaker reinsurers; continued prior-year reserve developments in the US; the likely need for the industry to make further provisions for asbestos in 2004; and diminishing parental support.
While the overall performance of the market continued to improve, divergence within the market continued to grow, said S&P.
“The performance of market participants continues to diverge as the catastrophe writers benefit from a benign year, while prior-year legacies and operational difficulties continue to drag down the larger players,” said Searby.
He warned that the combined ratios for the global reinsurance market can be expected to diverge by as much as 70%.
S&P said it did not expect to see more announcements of billion dollar reserving additions in the US during 2004, although reserving problems remain.
Given the current levels of profitability, however, it said some reinsurers would take the opportunity to top up their asbestos-related provisions. Although asbestos-related loss reserves among the major reinsurers had stayed fairly stable in recent years, there had been an acceleration in asbestos-related reserving in the U.S. primary market and this was expected to influence the reinsurance market over the coming years, S&P said.
Diminished parental support also looks set to become an increasingly prevalent ratings issue in 2004, particularly for subsidiaries that continued to underperform.
“Increased sophistication in the measurement of return over risk-based capital, and its application as a tool for measuring the relative performance of lines of business and/or subsidiaries, gives management less of an excuse to persevere with underperforming units than in the past,” said Searby.
