Rating Firm Questions Reinsurance Recoverability

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NU Online News Service, March, 14, 11:19 a.m.EST?Reinsurance collectibility was among the issueshighlighted by a rating firm analyst describing the outlook forproperty-casualty insurers at an agent-broker conference in SanFrancisco earlier this week.

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Noting that loss conditions and economic factors are keepingproperty-casualty insurers from capitalizing on the price gains intheir marketplace, Steve Dreyer, Standard & Poor's RatingsServices credit analyst and insurance practice leader, also saidinsurers have not fully accounted fully for the likelihood thatreinsurers might dispute certain some claims.

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"Take a look at the huge reserve increases that are beingannounced by major property-casualty insurers for asbestos andenvironmental losses," said Mr. Dreyer, in a talk at the NationalInsurance Leadership Symposium.

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"In the same breath that they are announcing staggeringmulti-billion dollar reserve increases, insurers are saying, 'don'tworry, reinsurers are going to pay for nearly all of it.' We arenot convinced that the reinsurers of this business written manyyears ago--if they even exist today--will be so agreeable."

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Mr. Dreyer said although most ceding companies have acknowledgedand accounted for some reinsurers being unable to pay, they havenot accounted fully for the likelihood that these claims might bedisputed by the reinsurers.

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Mr. Dreyer's comments came a few days after Warren Buffett cameout with a statement that an unnamed reinsurer had stopped payingclaims. While some analysts speculated that the company in questionwas Gerling Global Re, the company's U.S. subsidiary that is inrun-off, Christoph Groffy, representative for Gerling Group,vehemently denied the company is failing to pay claims.

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At the symposium, Mr. Dreyer said that in addition toreinsurance collectibility issues, a backlash from abuses of suretycontracts, terrorism, deteriorating asset quality, and a strugglingeconomy are contributing to S&P's negative outlook for theindustry.

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Although S&P maintains a negative outlook on the sector, Mr.Dreyer said the outlook would be reviewed again at mid-year.

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"If we can expect strong prices continuing well into 2004 andmoderation in the negative factors, we might be inclined to revisethe outlook to stable," Mr. Dreyer added. He noted that for each ofthe past two years, S&P's p-c rating downgrades haveoutnumbered upgrades by a margin of 20 to one.

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This year is shaping up to be less severe, but S&P'snegative outlook signals that downgrades will continue to outnumberupgrades, he said.

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"There are so many loopholes in the Terrorism Risk Insurance Actthat terrorism risk remains a major wild card for the industry. Thefederal backstop has provided psychological support but not strongfinancial support for insurance underwriters, which have nofoundation for accurately pricing the risk," observed Mr.Dreyer.

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He said also that, "it seems that those that need it aren'tbuying it or aren't buying enough because of what they perceive ashigh prices in a tough economy."

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Responding to questions about what early warning signs brokersshould monitor to anticipate an insurer's possible financialproblems, Mr. Dreyer cautioned that there is no magic predictor ofinsurer troubles.

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"We would certainly recommend looking at our financial strengthratings on insurers," Mr. Dreyer advised, "but brokers might alsobe attentive to market information.

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"Brokers are in a great position to observe insurers withpricing behavior that is clearly out of synch with the rest of themarket and could be even downright irrational.''

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He suggested brokers might also look at how financial marketsare treating the insurer's securities. Rapidly falling equityprices or widening yield spreads on the insurer's bonds could betelltale signs of trouble.

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However, he termed these indicators "very noisy. An insurer mayprice a product at a very low rate for a short period of time togain share in a particular line of business. Although we coulddebate the wisdom of that, it may not mean the insurer is introuble. Likewise, the stock or bond market could overreact to somebad news about an insurer that is financially strong."

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Addressing the influx of new reinsurers in Bermuda, Mr. Dreyersaid, "there is a wide variety of business plans and shareholderexpectations among the startups. It is misleading to think aboutthe new companies as identical. In order for us to be comfortablein rating a startup company, we have to be confident that themanagement team is capable and committed to sticking to aconservative business plan.

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"Having lots of capital is a good start, but no startup companyis going to be assigned a rating at the very highest levels, norwould we foresee all the startups getting the same rating. They arevery different companies with very different organizationalstructures, shareholder commitment, and competitive advantage."

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To date, Standard & Poor's has assigned ratings only to AxisSpecialty Insurance Co. and DaVinci Reinsurance Ltd. Both companieshave been assigned 'A' financial strength ratings.

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The Symposium was sponsored by The Council of Insurance Agents& Brokers in association with the Reinsurance Association ofAmerica, the American Insurance Association, and RussellMiller.

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A report of Mr. Dreyer's remarks was released by hiscompany.

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