Large Cats Could Drain Global Capital, Fitch Says

NU Online News Service, Sept. 2, 3:00 p.m. EDT

Global reinsurers may struggle to replenish capital if they suffer large catastrophe losses in the current financial market and economic environment, according to Fitch Ratings' "2009-2010 Global Reinsurance Review and Outlook," published today.

Fitch's rating outlook for the global reinsurance sector remains Negative.

Fitch expressed concern that insurers' access to capital markets may be restricted as a result of global economic weakness. The agency said there is an elevated likelihood reinsurers could be forced to operate with weaker capital bases for a prolonged period of time.

"This represents a heightened vulnerability for the reinsurance sector," said David Stephenson, director, in Fitch's Insurance rating group.

Mark Rouck, a senior director at Fitch, added, "Volatile conditions in capital markets persist, and these continue to create uncertainty over the availability and affordability of new capital in the event of significant need."

Reinsurers with a strong focus on property-catastrophe risks that incur outsized losses relative to peers, or relative to market share in affected regions, are most vulnerable if refinancing options remain scarce, in Fitch's view.

Additionally, reinsurers lacking underwriting track records or previous histories of meaningful capital markets access could be pressured. Large global reinsurers with a longer underwriting history and track record of accessing capital markets are more likely to be able to withstand and recover from a significant catastrophe loss.

Key near-term rating concerns also include non-life reinsurers' accident-year underwriting profitability. Fitch expects 2009 underwriting margins will narrow and reserve development will have a less favorable effect on underwriting profitability than it has in recent periods.

Fitch said reinsurers have, in general, performed better during the financial and economic disruption of the past 12 months than primary insurance companies.

As a result, despite the risks outlined, Fitch believes the reinsurance sector will be one of the first insurance sectors to return to a stable rating outlook in its universe of ratings coverage.