A.M. Best Co. said yesterday it is not giving up its negative views of the United States and Bermuda reinsurance markets, adding that upgrades and positive outlooks will be few and far between this year.
The Oldwick, N.J.-based firm said in a statement that it has completed its assessment of the U.S. and Bermuda reinsurance markets and is extending its negative outlook for 2006.
A.M. Best said that although there were a number of rating downgrades in 2005 and that currently, only a few reinsurers in these sectors hold ratings with negative outlooks, "the underlying stability of these markets remains tenuous."
In its announcement, Best noted that investor expectation may fuel more price competition in the U.S. and Bermuda reinsurance sectors, noting that investor expectations for double-digit returns are running high.
Should currently perceived market opportunities in property not be significantly realized, Best said companies that received much of the new capital that flowed into these markets might be forced to find alternative strategies–including taking on casualty business.
Casualty business has seen little if any benefit from the hurricane losses in 2005, the rating agency said, adding that if companies seek to diversify the new capital into casualty, such actions could trigger additional softening for the casualty segment.
Material storm losses in 2006, or further reserve development from the 2005 storms could help to prolong the hard property market, but at an additional cost to earnings and capital, Best said. The ratings agency added that the financial flexibility of some companies is already stretched to the limit.
Measuring the flexibility in terms of debt-to-capital ratios, Best said the ratios for the industry at an all time high. Best also noted that investors' appetites to continue putting money into these sectors could wane.
"While common equity has previously flowed into the market with relatively little resistance, A.M. Best questions if another year of losses will dampen investors' appetites for a stake in insurance and reinsurance holdings," the statement said.
Best also confirmed that as a result of the hurricane losses in 2005, the firm "has and will continue to take a more rigorous approach in its due diligence as regards the evaluation of companies' capitalization and risk management controls." In particular, the rating agency highlighted the use of catastrophe models, noting that these "valuable tools" should not be the sole barometer for the quantification of risk.
"Management will need to demonstrate confidence in the data and parameters employed throughout the modeling exercise," Best said, adding that analysts will also be looking for reinsurer management teams to "better demonstrate that underwriting and risk controls are adequate." The controls, Best said, need to be adequate "to ensure that there is a clear understanding and controlled correlation with unmodeled exposures."
As Best has said in previous announcements, it will be requiring more detailed information through its supplementary rating questionnaire and in company meetings.
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