S&P: Insurers Weathering Capital Losses
NU Online News Service, Oct. 9, 4:11 p.m. EST? Insurers and reinsurers' credit strength in the global market over the past three years has proved largely resilient despite a net reduction in capital of about $170 billion, Standard & Poor's in London said today.
"The drain on capital in the market, due to underwriting losses, significant claims activity arising from the Sept. 11 terrorist attacks, and the poorly performing investment markets has now reached the $200 billion mark," said an S&P credit analyst, Rob Jones.
"Set against new capital of approximately $30 billion raised over the past year, there remains a significant shortfall compared with the capital levels of previous years," Mr. Jones observed.
The majority of market participants have weathered the falls, however, with those market participants that have had their insurer financial strength ratings lowered generally only seeing a downgrade of one notch–a notch being the differentiator between, for example, a "BBB-plus" and a "BBB" rating.
In addition, while capitalization has played a key role in some recent rating actions, other factors have been equally important in the rating analysis.
Meanwhile, to compound the deterioration in capital levels, S&P said insurers have found it hard to replenish capital through the equity and debt markets.
"Equity is being raised, but typically on highly discounted terms, and capital markets are increasingly conservative toward buying insurance debt. Although some higher-rated debt issuance from insurance companies has been successfully placed over the past year, the capital markets will only accommodate a limited amount of debt from any given sector," Mr. Jones said.
"Combined with the significant recent losses suffered by the insurance industry and a consequent lack of confidence, tolerance for insurance debt is limited," he added.
However, he said that the conservatism of the capital markets toward insurers is not expected to last over the long term.
"There will be some respite for insurers wanting to issue debt," he said. "Issuers with strong business franchises and earnings capacity should be able to raise finance on reasonable terms prospectively."
Nevertheless, he noted, this might not be achieved until the impact of the hard market conditions is evidenced in reported earnings. "Market profitability is expected to be very strong in 2003 and 2004," he said.
S&P analysts said they find that despite the very significant deterioration in capital, the pressure on credit strength has been offset in part by the historically high capitalization of the market.
"Many insurers have long been overcapitalized, and this has been partly responsible for their ability to accommodate the current difficult operating conditions," said Mr. Jones.
He added that "ratings are not just about capital adequacy. Franchise strength, earnings power, and financial flexibility–that is, the ability to source capital relative to capital requirements–are also of critical importance to long-term financial strength."
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