S&P: Weak Profitability Drove Reinsurance Downgrades

Disappointing profitability, not the existing level of capital adequacy, was the main driver behind recent downgrades of several reinsurers, Standard & Poor’s Ratings Services said in a report. During the past 18 months, reinsurance group profitability fell short of Standard & Poor’s expectations, established in 2002, according to the report.

Profits are central to the long-term financial strength of any (re)insurer, Standard & Poor’s said. In any industry, profits are required to pay an adequate return to the providers of capital. Prospective profitability is also critical, because it is the sustainability or otherwise of profits that largely determines whether a company is able to raise fresh capital if required.

In Standard & Poor’s view, the underlying improvement in profitability currently being enjoyed by the reinsurance industry may not be as marked as in the previous cycle once other factors are taken into account.

Consequently, the trend in long-term profitability appears to be downward. Standard & Poor’s therefore concludes that the industry risk for many of the larger reinsurers is higher, and their business position weaker, than had previously been assessed.

The commentary article titled “Profitability, Not Capital, is the Driver Behind Recent Reinsurer Downgrades” was published on Sept. 29, 2003, and can be found on RatingsDirect, Standard & Poor’s Web-based credit analysis system, at www.ratingsdirect.com.