“This represents a heightened vulnerability for the reinsurance sector,” says David Stephenson, Director, in Fitch’s Insurance rating group. “Volatile conditions in capital markets persist, and these continue to create uncertainty over the availability and affordability of new capital in the event of significant need,” adds Mark Rouck, a Senior Director at Fitch.
Reinsurers with a strong focus on property catastrophe risks that incur outsized losses relative to peers, or relative to market share in affected regions, are most vulnerable if refinancing options remain scarce, in Fitch’s view. Additionally, reinsurers lacking underwriting track records or previous histories of meaningful capital markets access could be pressured. Large global reinsurers with a longer underwriting history and track record of accessing capital markets are more likely to be able to withstand and recover from a significant catastrophe loss.
Key near-term rating concerns also include non-life reinsurers’ accident year underwriting profitability. Fitch expects that 2009 underwriting margins will narrow and reserve development will have a less favourable effect on underwriting profitability than it has in recent periods. The agency continues to have concerns about life reinsurers’ ongoing exposure to capital markets volatility due to their higher investment leverage than non-life peers.
Fitch notes that reinsurers have, in general, performed better during the financial and economic disruption of the past 12 months than primary insurance companies. The agency attributes this to reinsurers’ generally high quality investment portfolios and low asset leverage.
As a result, despite the risks outlined above, Fitch believes that the reinsurance sector will be one of the first insurance sectors to return to a stable rating outlook in its universe of ratings coverage. A stable sector outlook would require a return to capital markets conditions that suggest reinsurers would have access to reasonably priced funding enabling them to rebuild capital after a major catastrophe event. Fitch expects sustainable reductions in credit spreads and financial market volatility to be precursors to such conditions. Further supporting factors would be an absence of new adverse economic developments, such as high inflation, and continued strong reinsurance underwriting results.
In the first half of 2009, reinsurers in Fitch’s universe of coverage recovered approximately 35% of 2008’s decline in shareholders’ equity as bond spreads declined, equity market values increased and non-life reinsurance underwriting results remained good.
