Best Changes Global Re Outlook To 'Stable'

A.M. Best announced yesterday that it has changed the rating outlook of the global reinsurance sector to "stable" from "negative," reversing the dim view it has held for an extended period.

The negative outlook assigned nearly two years ago implied that rating downgrades would outpace upgrades.

The revised outlook of stable instead means that the Oldwick, N.J.-based rating firm believes the majority of 2007 rating actions will be affirmations of existing ratings with stable outlooks, and that only a modest amount of outlook changes for individual reinsurers are anticipated.

Factors prompting Best to change the outlook, according to a report issued yesterday, are:

o The very strong financial performance of global reinsurers in 2006.

o January 1 renewals "that set the tone for near-term optimism."

o Less adverse loss development on older casualty years.

In spite of the upbeat tone for the near term, Best analysts said they are less optimistic about the longer term, pointing to the "resounding sentiment that market conditions will continue to deteriorate."

In the report, Best also reviewed developments in the Lloyd's and Bermuda markets, as well as the Asia/Pacific region, and offered commentary on recent reinsurer merger activity and developments in the capital markets.

On the merger and acquisition front, Best said the past two years has been marked by increased activity, with most acquirers demonstrating opportunistic behavior--snapping up targets that were on the block for a number of years because of poor financial performance or impaired financial flexibility.

Deals going forward, Best predicted, will be struck by reinsurers looking to secure their positions in a softening market.

The rating agency also predicted that announcements of very large deals are unlikely for the balance of the year.

Commenting on the one large transaction already arranged this year--in which SCOR has secured over a 96 percent stake in Converium--Best said it comes at a time when rates are softening in most lines. As a result, "it is not clear whether the combined group, over time, can achieve the business plan it has communicated to investors," the report said.

Turning to the market for insurance-linked securitizations such as catastrophe bonds, Best said it expects this market to grow, and that the continued growth will moderate pricing cycles in the global reinsurance market.

Noting that catastrophe bond issuance stood at $4.8 billion through midyear--and that it's expected to grow to $6 billion by year-end--Best also highlighted trends in recent transactions, including:

o Greater involvement of primary insurers, like Allstate, in sponsoring insurance-linked securities.

o A large number of first-time issuers and sponsors, like Travelers and Chubb.

o More attention to U.S. Northeast exposure in wind-related cat bonds being issued.