However, analysts also say that small-to-medium sized reinsurers with a strategic focus can often outperform even the biggest Triple-A rated companies.

“I think there is a tendency to say that big is beautiful in the reinsurance area,” said Christian Dinesen, a director of Standard & Poors Financial Services Ratings in London. “But I dont necessarily think that small-to-medium sized companies should, by the factor of their size, have a worse time.”

Being a big company does not necessarily translate into profitability or better margins, at least not in an ongoing soft market, said Donald Watson, director of S&P Insurance Ratings in New York.

Copenhagen Re was downgraded by A.M. Best to “C-plus” (Marginal) from “B” (Fair), while Moodys Investors Service downgraded the company from a “Ba2″ to a “Caa2.” Best withdrew the financial strength rating of Copenhagen Re upon request from the company.

Moodys said that the rating action follows the recent announcement that
the company will not write new reinsurance business during the 2001/2002
renewal season. Both rating agencies based their ratings decision on the fact that Copenhagen Res capital base is being further eroded by escalating WTC loss estimates–the most recent estimate being DKK 700 million ($83.7 million at current exchange rates). The agencies also said that further capital support from Copenhagen Res parent company–Alm Brand, a Danish mutual company– was not expected.

A representative for Copenhagen Re said that while the company made a decision not to participate in the upcoming January renewals, it is working to set up a reinsurance joint venture or to strengthen the equity capital in the company. The representative emphasized the company is not in run-off. “Were looking to come back in the course of 2002.”

The issue with Copenhagen Re is that it already had pressure on its ratings as a result of the soft market and the fact that much of its senior management left to form another company several years ago, said Mark Hewlett, managing director at Moodys Insurance Europe in London.

There was a need for some restructuring at Copenhagen Re and the WTC loss hit at a very bad time, but that could happen for any company, small or large, Mr. Dinesen said.

Mr. Hewlett said there will continue to be a place for smaller reinsurers to provide capacity in specialty areas that are experiencing dramatic price increases during the hardening market–as long as they are well rated, because there is likely to be a flight to quality.

“The market perception is that you need $1 billion of capital and $1 billion of premium to be a top-tier player,” said Mr. Watson. “But S&P says that you can be a successful player even in the middle tier of companies with less than $600 million of premium.” He noted there are a number of companies that have done well that are under the $600 million premium level.

The mid-sized and smaller reinsurers can focus on their technical expertise, and to the extent they dont stray from that, they can earn consistently better returns than the largest reinsurers, he said. He cited examples of specialty writers such as Renaissance Re and ACE Tempest, which focus on property-catastrophe business, and regional players like Sirius International in Sweden and PMA Re in the United States.

Renaissance Re in Bermuda had $290 million of premium in 2000 and has consistently had one of the highest returns on equity and return on revenue, “which reflects their underwriting expertise in a narrow segment of the market,” Mr. Watson said. The largest 10 reinsurers have had a singularly bad performance over the last few years, reflecting the soft market conditions and the inability of these managers to select risk, he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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