Reinsurers Keeping Adequate Prices, Ratings Firm Says

Fitch's Senior Director Mark Rouck said during a conference call discussing the agency's findings that European casualty rates were flat to up 5 percent, while U.S. casualty rates dropped 5-to-15 percent. On property reinsurance, European property rates fell 5-to-15 percent, while U.S. property rates without Florida exposures were flat to down 10 percent. U.S. property rates with Florida exposures were up 10-to 20-percent.

"Current premium rates remain technically adequate, meaning they are sufficient to produce underwriting profit on an accident-year basis," Mr. Rouck said.

There are several factors at play that are helping to keep rates in adequate levels. First, rates would have fallen further in the renewal season if not for record catastrophe-related losses last year, Mr. Rouck said.

Another factor that supported adequate rates was the limited amount of net new capital that flowed into the sector in 2004. "Capital flows into the sector, often in the form of hedge fund investments, were largely offset by capital outflows in the form of special dividends or share repurchases," according to the Fitch analyst.

The historically low interest rates also helped by forcing reinsurers to achieve underwriting profitability to generate acceptable rates of return, according to the analysts.

Additionally, memories of adverse reserve development and concerns about the inherent difficulties in settling long-tailed reserves also likely provided support for adequate rates, Mr. Rouck said.

In addition to adequate prices, terms and conditions held firm during the recent renewal season, Fitch found.

Mr. Rouck said Fitch believes "this is important because loosening terms and conditions are often precursors to significant rate declines."

He noted that, "Loosening terms and conditions can have a greater effect on underwriting profitability than premium rate declines." Mr. Rouck added that stable terms and conditions are key factors supporting Fitch's forecast for a profitable 2005 accident year for the sector.

Mr. Rouck said he expects the reinsurance sector's 2005 calendar-year combined ratio to reach 96 to 98, including one-to-two points added for prior accident year reserve development.

Fitch's Senior Director Chris Waterman also predicted that the next soft market phase will be "shorter and less severe" than the one in the mid-to-late 1990s.

Reinsurers during that soft market period used investment income from the 1990s' bull market to bankroll inadequate premium rates, Mr. Waterman said. But this time around, "we certainly don't expect the investment market and the reinsurance premium-rate cycles to coincide again in the same way."