“A few months later, Hartford Financial Services Group Inc. announced a gross increase of $3.9 billion with a net of $2.6 billion,” S&P said in its report titled “Collateralization: Curse or Cure?”

“In the first half of 2003 alone, four large insurers–ACE, AIG, Hartford and Travelers Property Casualty Corp.–expected almost half of their collective $10 billion boost to reserves to come from reinsurers,” the ratings agency said.

However, insurers “could be leaning ever more heavily on an increasingly rotten reinsurance crutch,” the S&P report said.

S&P explained that it has lowered its financial strength ratings on nearly all of the large reinsurers in the past two yearsa reflection of “swollen claims activity related to the U.S. litigation climate, losses inflicted by terrorism and poor investments.”

The report pointed to the fact that several European reinsurance players, including Axa, Gerling Global and SCOR, have placed their U.S. operations in runoff, “while some U.S. insurance conglomerates, among them Hartford and St. Paul, have sold off their reinsurance operations.”

Further, Bermuda players Annuity & Life Re and Trenwick were placed in runoff as a result of financial deterioration, S&P said.

S&P said the fortunes of reinsurers follow closely those of their customers. “In other words, reinsurers are likely to encounter difficulties just when primary companies need them most,” S&P said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 18, 2003. Copyright 2003 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.