NU Online News Service, Sept. 8, 3:37 p.m. EDT
MONTE CARLO--Reinsurers at the annual Reinsurance Rendez-Vous de Septembre meeting here are finding rating agencies have a divided opinion of how their industry is faring.
Two rating agencies have assigned the reinsurance sector negative outlooks for the coming year, while two have more positive projections.
Fitch and Moody's both assigned negative forecasts. Moody's announced here that it downgraded its forecast as of last Friday to negative from stable, saying it believes credit support over the next year will most likely weaken and that the sector has too much capacity for the current demand.
Moody's, in fact, told National Underwriter this is its first such downgrade since 2003, which reflected repercussions from the events of Sept. 11, 2001.
Fitch maintained a negative forecast, citing potential problems replenishing capacity in the event of a major catastrophe. The agency said it believes there is an elevated likelihood that reinsurers could be forced to operate with weaker capital bases for a prolonged period of time.
Ted Collins, group managing director for Moody's, said at a press conference here that if faced with a balance sheet dilemma, most companies would choose to find more capital and go on serving clients and intermediaries.
"The question, and one of the reasons our outlook is negative for the market is because we think it's less certain they would be able to do that, post catastrophe." He added, "That said, if there were a very large event, it's reasonable to expect that some ratings would go down."
Moody's said it believes conditions will worsen because demand is weakening and primary prices are weak, challenging reinsurers.
In prior periods reinsurers have come to rely on investors to refurbish capital, but Moody's finds that is more difficult to accomplish now. Mr. Collins said reinsurers facing a large catastrophe may have difficulty attaining capital.
A.M. Best and Standard & Poor's, on the other hand, expressed more positive outlooks, citing confidence in the reinsurance industry's ability to reload capacity if needed.
John Andre, group vice president, global reinsurance, with A.M. Best, said any financial flexibility concerns are abated. He said catastrophe markets are opening up and cat bonds have been issued. He added that reinsurers for the large part are durable.
"We figure about 15 percent of capacity came out of the market in '08; however, you saw very few rating downgrades last year." He said A.M. Best builds a large margin into the capital model when companies are measured. Because of this asset cushion, reinsurers for the most part were able to maintain their ratings changes last year.
Mr. Andre said that after consideration the agency decided to take a stable outlook on global non-life reinsurers.
He said the outlook is measured on how many rating actions the agency expects to take. "Of the 45-50 reinsurers in this area, we expect to see most of those ratings as they come up on renewal to be affirmations." He said key drivers are strong earnings for the six months and the companies' embrace of enterprise risk management.
He noted, however, that the agency doesn't believe pricing is where it needs to be. Although June and July cat reinsurance renewals were up 10-15 percent, whether this was sufficient to cover the risk involved remains to be seen. Casualty rates also are not turning as expected. He said optimism for Jan. 1, 2010 "varies, depending on who you speak to."
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