Ratings Outlook Still Dim For Re: S&P

"[T]he market continues to suffer from diminished quality of capital, reduced financial flexibility (defined as the ability to source capital relative to requirements), prior-year liabilities, the overhang of reinsurance recoverables and the likelihood that many companies' operating performance will fall short of expectations," S&P said.

Reinsurers have found it diffiucult to capitalize on the hard market conditions of recent years, the report continued, noting that the ease of entry for new players and increased competition in the market have dampened the ability of existing players to recover.

The performance of the four largest reinsurers?Munich Reinsurance Co., Swiss Reinsurance Co., Employers Reinsurance Corp., and General Reinsurance Corp., which comprise 32.3 percent of the market?has been lackluster in the period from 2000-2002, the report said.

On the other hand, many established Bermuda-based companies have fared much better than the big reinsurance groups during the same period, S&P continued. In addition, the more recently formed companies have "outperformed the more-established Bermuda companies," the report said.

These companies have an ability to write business opportunistically, moving in and out of business lines, which "is a key component for success," S&P said.

"By contrast, the larger groups, which have tended to be more relationship based, have been slower to move out of unprofitable lines of business and have perhaps been impeded by longer lines of communication," the report said. "Although the intent of senior management in large organizations can be crystal clear, communicating the need for change and making it happen can prove extremely challenging."

S&P cautioned the industry to build on rate hardening and tightening of terms and conditions that started in early 2001.

While rates in many casualty classes, such as workers' compensation, directors and officers and medical malpractice, continue to rise, S&P said "there are already signs that certain sectors of the market have peaked."

"U.S. property, global property catastrophe, retrocession and aviation lines have reached or passed their peak, leaving the sustainability of the improvement in terms and conditions subject to some conjecture," the report went on to say.

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