Slow Turnaround For Europeans InternationalEditor

A ratings analyst in London equated thesituation in the European insurance and reinsurance sector tosupertankers that are being slowly turned around.

That sentiment was reflected in recent downgrades. One was byMoodys Investors Service of Royal & SunAlliance andsubsidiaries–by one notch to “Baa2″ from “Baa1″. The other camefrom Standard & Poors, which lowered long-term counterpartycredit and insurer financial strength ratings on the Paris-basedreinsurer SCOR and its subsidiaries to “triple-B-plus” from“A-minus.”

In interviews, ratings and equities analysts also discussedMunich Res and Swiss Res turnaround efforts.

David Wharrier, director for Fitch Ratings in London, theanalyst who compared European companies to supertankers, noted that“some are easier to turn around than others.”

Regarding the R&SA rating action, Moodys commented thatdespite the improvement in the groups capital position, “it hasconcerns about legacy issues in the United States, its ability tocapitalize fully on favorable market conditions, and its ability tomaintain its position and earnings in some of its coremarkets.”

Of particular concern for Moodys is R&SAs U.S. capitalposition due to “the potential for adverse loss reservedevelopment; significant [asbestos and environmental] liabilities;reinsurance recoverables; unfunded pension liabilities; anduncertainty with respect to litigation issues facing thegroup.”

Commenting on the rating, R&SAs Finance Director JulianHance said: “We have achieved most of the major objectives that weannounced in our November 2002 action plan, including the IPO ofour Australian operations and the sale of RSUI [its former U.S.surplus lines subsidiary], on terms generally better thananticipated, and have significantly improved the groups capitalposition by 900 million [$1.5 billion].”

Noting an improved first-quarter combined ratio of 99, he said,“We do not believe that there is any information that has beenprovided to Moodys which could have led them to this decision,”expressing disappointment that “delivered improvements to date”were not “more fully taken into account.”

Meanwhile, S&P lowered the ratings of SCOR due to thecompanys disappointing results, “indications of a weakened althoughstill strong business position, and the potential for reportedcapital to be materially affected by further reservestrengthening,” said Marcus Rivaldi, S&Ps credit analyst inLondon, in a statement. S&P noted that potential strengtheningrelates primarily to SCORs credit derivatives portfolio and its CRPsubgroup, which comprises Commercial Risk Reinsurance Co. Ltd. andCommercial Risk Reinsurance Co.

Should the balance sheet improvement occur, S&P may raiseSCORs rating into the “A” range, said Mr. Rivaldi.

SCOR said it regrets the S&P decision because “it does notreflect the improvement in the groups financial condition followingreserves booked and recapitalization at the end of 2002.” Further,the rating action does not reflect the impact of recovery measuresintroduced since that time, as part of the companys “back on track”plan adopted in November 2002.

“Regarding CRP, it was decided that this subsidiary would ceasewriting all further business with effect from January 2003,” SCORsaid. “Commutations are now in progress, as are talks with apotential buyer.”

SCOR said it intends to maintain a prudent underwriting policyand to strengthen its balance sheet to ensure the optimum securityfor its customers, which is the reason it decided to spin-off itslife reinsurance activities into a newly created subsidiary.

Life reinsurance is one area in which a “triple-B-plus” rating“would have a serious impact on new business,” according toCommerzbank Securities, which commented in a market letter lastweek that the rating is “not as bad as it could have been, but isstill a challenge.”

Greg Carter, senior director of Fitch, said Fitch affirmed its“triple-B” ratings of SCOR following first-quarter results. “As areinsurer, to be rated “triple-B” is not great. But I think one ofthe benefits that SCOR has is that its well supported by Frenchinstitutions, certainly in terms of the capital raising exercisethat it undertook towards the end of last year,” he said.

Regarding the restructuring under way in companies like MunichRe, Christopher Hitchings, European insurance analyst withCommerzbank Securities, asserted that Munich Re needs 5 billioneuros ($5.7 billion) in new equity capital by the end of the yearto prevent S&P from lowering its rating from the current“double-A-minus.”

In mid-June, S&P said it expects that Munich Re will restoreits capital adequacy “to at least a strong level by the end of theyear.” Stephen Searby, a director of S&P in London, said: “Theyhave made considerable progress in terms of turning around theiroperating performance. But as we have stated publicly, we stillbelieve further capital is required, if only to fill the hole thatthe obvious volatility in their asset portfolio has potential tocause.”

Mr. Hitchings predicted that Munich Re will conduct an equityissue of some sort by September.

Fitchs Mr. Wharrier said he is less concerned about Munich Rescapital position. “The main issue weve got with Munich Re isearnings and whether the earnings deserve the rating of being highin the double-A range,” he said.

Munich Re has got to prove in 2003, during the top of the cycle,“that they can really generate earnings that will offset a downturnwhen it comes, should the rates soften over the next couple ofyears,” he said. He said Fitch took comfort from the 3.4 billioneuros ($3.9 billion) capital raising exercise that Munich Realready completed earlier this year.

Fitchs Andrew Murray said: “For the kind of rating wevecurrently got them on”double-A-plus”wed be looking for them tooutperform the rest of the market. Historically they probablyhavent really demonstrated that.”

Discussing Swiss Re, Mr. Hitchings said it now has the strongestbalance sheet of any European reinsurer, although the past twoyears have tested the reinsurance industry to the limit. “None haveemerged with their reputations intact,” he said.

“Swiss Res main issue is that its reserving base has held upwell,” he said. “The only prior year reserve positioning it had todo was on a couple of problematic direct businesses and of coursethe pesky Lloyds Central Fund reinsurance,” he said. (Swiss Re waslead reinsurer for coverage of the Lloyds Central Fund, the subjectof a coverage dispute that Lloyds has taken into arbitration.)

Further, Mr. Hitchings said, Swiss Re raised new equity late in2001–earlier than any of the other existing reinsurers.

Mr. Searby at S&P said Swiss Res operating performance in2002 wasnt “particularly stellar. There have been a few issuessorting out their financial services business group, which iscausing a drag on profitability,” he added.

“The problems that are weighing on other parts of the industryperhaps dont weigh quite as heavily on them. But theyre certainlynot immune,” he said.

Mr. Searby noted that Swiss Re has hedged down a significantportion of its equity exposure. Although the company has made nospecific reserving actions, “no doubt theyve suffered likeeverybody else in the U.S. from the long tail liability business,”he said.

“The other thing to remember with Swiss Re is that a significantpercentage of business is life reinsurance,” he said. Not only doesSwiss Re have a very dominant position in life reinsurance, whichis advantageous because of the prices it can charge, but unlikenon-life, the business is far more stable, he said.

Reproduced from National Underwriter Edition, July 14, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.