Standard & Poor’s Ratings Services said today it will maintain its negative outlook for the global reinsurance sector due to the catastrophic hurricanes of 2005.
“The outlook reflects near-term strains on reinsurers’ financial strength, after 2005 saw the largest catastrophe losses in the industry’s history,” said Standard & Poor’s credit analyst Laline Carvalho. “The outlook also indicates that there will be slightly more downgrades than upgrades among rated entities in the near term.”
In an article titled “Global Reinsurance 2006 Outlook: Volatile Earnings And Near-Term Capital Strain Dog Sector,” S&P said the major hurricanes hitting North America in 2005, Katrina, Rita, and Wilma, caused an aggregate loss between $70 billion and $90 billion for primary and reinsurance companies.
Reinsurers, the agency noted, will be liable for a large portion of those losses, which could strain some companies’ financial resources. Additionally, S&P said it also has concerns regarding how much coverage companies will write, pricing, and the potential for negative consequences on reserves due to the 2005 hurricanes.
Although five companies have been downgraded by S&P in recent months, most reinsurers rated in the ‘A’ or ‘AA’ categories. The agency’s negative outlook on the industry is counterbalanced somewhat by its expectations of higher pricing in 2006, continued support of the industry by the capital markets, and major enhancements in the modeling and risk management tools utilized by reinsurers.
S&P said it will reevaluate the industry after the impact of the key Jan. 1 renewal period in 2006, and after it has resolved the status of several individual issuers currently on CreditWatch with negative implications. If companies do not suffer any unexpected substantial losses in 2006, S&P said it believes the reinsurance industry’s operating results could improve “substantially” next year.