Reinsurers Capital Shock Absorber Now Worn Away, Says S&P

Much of the excess capital cushion that reinsurers have used to absorb the shocks of the past year, has been eroded, Standard & Poor's Ratings Services said in a report published today.

And if reinsurers don't raise rates high enough to refill their coffers, they might see ratings downgrades, S&P warned.

The study by the S&P London office is titled "Global Reinsurance: Excess Capital Absorbs The Shock To Date; But There Is Limited Further Margin For Error."

According to S&P's analysis, the excess capital built by the sector, driven by two successive years of record profitability, has enabled most reinsurers to withstand the extreme stresses applied to both sides of the balance sheet, particularly during the second half of the year.

"This explains why we have not yet seen the need to take widespread negative rating actions within the sector," commented Peter Grant, S&P credit analyst in a statement.

Nonetheless, S&P said it has revised some of its medium-term expectations for the sector in light of recent events.

The firm said it now expects the combination of the substantial capital depletion seen to date, lower prospective investment yields, a spike in the cost of capital, and constrained financial flexibility to translate into substantial (risk-adjusted) price increases at the forthcoming January renewal.

S&P said it believes that average price increases of between 5 percent and 10 percent will be necessary to enable reinsurers to rebuild excess capital to the extent the firm considers necessary to compensate for the reinsurers loss of financial flexibility.

Mr. Grant said, "Lesser price increases could cause us to change our outlook on the sector to negative, and to revise the outlook or ratings on those reinsurers that we believe to be most exposed, namely those that are either thinly capitalized relative to their current rating level or that are, in our view, excessively exposed to further declines in investment markets or concentrations of insurance risk."