S&P Stresses Importance of ‘Financial Flexibility’ for Reinsurers

An article published in Standard & Poor’s Ratings Direct stresses that “financial flexibility continues to be an extremely important rating factor.” The publication, entitled “More Frequent Catastrophes Could Undermine Reinsurers’ Access To The Capital Markets,” notes that “financial flexibility is taking on greater importance in
times of stress, such as following a large catastrophic event.”

S&P also indicated that it “expects that reinsurers will continue to maintain financial flexibility consistent with the ratings in 2006 but views that those companies that have historically shown the ability to earn better returns, that have stronger risk management, and price adequately will have financial flexibility greater than peers when needed.”

The report notes: “Although the property/casualty reinsurance sector’s earnings were poor in 2005, they should improve as rate increases from the January 2006 renewals flow through to the income statement. For short-tail property exposures in the Gulf region of the U.S., rate increases of 50 percent-100 percent were not unusual. However, mitigating this positive factor is the view that short-tail rates did not increase as much as expected outside the U.S., especially in locations that have not experienced significant catastrophe losses in recent years. In such areas, pricing either stayed the same or increased only moderately (up to about 10 percent). Moreover, it could be argued that with higher frequency and severity assumptions for catastrophe risk, some accounts actually received a risk-adjusted rate decrease in 2006.”

S&P also indicated: “In terms of volatility, the view that there is higher earnings volatility than previously expected has been largely factored into many ratings already, and broad rating changes in this regard are not expected. However, earnings volatility—not only capital volatility—remains a key rating factor. The industry continues to react to events and losses, adjusting models for frequency and severity after sizeable losses. This is still a risk if events were to occur in new locations or a terrorist attack were to correlate what were previously believed to be diversified exposures. “

The report is available to subscribers of RatingsDirect, S&P’s Web-based credit research and analysis system, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor’s public Web site at: www.standardandpoors.com.