Fitch Ratings this morning maintained its stable outlook on the reinsurance industry, asserting that the carriers' strong capital base resulting from the hard market of the past couple of years will shore them up against Hurricane Katrina strains.
Fitch analyst Mark Rouck said that while Katrina will contribute to significant catastrophe losses, it will also result in further hardening of prices in the southeastern United States.
Aside from Katrina, recent industry trends have been favorable from an earnings and capital perspective.
In addition, reserve development will be modest in the coming year compared to "what was experienced in the dark days of 2001 and 2002."
Mr. Rouck noted that, "We view significant merger and acquisition activity and expansion beyond core competency as indications that reinsurers may be experiencing difficulty coping with cyclical underwriting conditions."
As for the full-year 2005 results, Mr. Rouck said they should be "reasonably healthy" for the industry but, overall, affected by Katrina losses.
Katrina losses will exceed those of the four hurricane losses, since reinsurance is designed for greater protections against one $20 billion loss than for five $4 billion losses, Mr. Rouck said.
While net premiums will decline in 2005, the following year will see an upward trend in rates and written premium.
New capital from sources such as hedge funds has flowed into the sector in the past couple of years, putting downward pressure on rates. But this effect has been offset by capital management techniques such as share buybacks and special dividends, which have shown a new unwillingness on the part of the reinsurers to repeat the turn-of-the-century marketplace share wars.
"Whether it will be enough to offset pre-Katrina premium rate pressure remains to be seen," Mr. Rouck said.
Downward reinsurance rate pressure also resulted from cedents retaining more risk partly to avoid reinsurance disputes. But new reinsurance demands from Chinese and Indian markets filled in some supply gaps.
And finally, rising interest rates in the U.S. will help improve investment returns for domestic carriers, although this will not be the case in Europe, where rates remain low, according to Fitch.
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