January 20, 2014 5:10 pm

Reinsurers face ratings cuts, S&P warns

Global reinsurers are facing potential credit rating downgrades after Standard & Poor’s warned the industry had “nowhere to hide” from mounting competition.

The rating agency said the sector had reached a “tipping point” over the new year, when primary insurers renewing their annual reinsurance policies secured the biggest drop in premiums in more than a decade.

Consolidation “may be one of the few viable survival options” for some smaller reinsurance companies trying to compete globally with larger rivals, said Dennis Sugrue, insurance director at S&P.

Shares in some of the biggest reinsurers have fallen since the new year on concerns about how they are coping with pricing pressure. A wave of funding into reinsurance from alternative sources has helped pushed premiums lower.

Capital markets investors are investing in the sector through specialist vehicles set up by reinsurers that non-insurers can invest in, known as “sidecars”, as well as instruments such as catastrophe bonds being issued by primary insurers.

S&P said this, along with a relative lack of costly natural disasters, had contributed to an “oversupply” of capital and warned profitability of the companies was “likely to be hit from many angles”.

It is the first time S&P has issued such a downbeat view of the industry since hurricane Katrina prompted it to downgrade a series of reinsurers eight years ago.

While S&P did not single out any particular company, it said “nearly half” of the reinsurers whose creditworthiness it rates were “significantly exposed” to pressures arising from mounting competition.

The agency rates 22 companies in the sector, from large European-based groups such as Munich Re and Swiss Re to Bermuda-based Validus, Arch and Axis. It also rates the Lloyd’s of London market.

As well as small reinsurers, those that provided a relatively high amount of natural disaster coverage – an especially competitive area – would be under the greatest pressure, S&P said.

The pressures would ultimately lead to “consolidation or negative rating actions for a select few”.

Ratings are especially important in the insurance and reinsurance industry as buyers of the protection use them to help determine how much cover to buy from particular companies and on what terms.

Primary insurance companies should benefit from lower reinsurance costs. However, many big groups write insurance and reinsurance.

S&P disclosed its negative view of reinsurers as another rating agency cautioned about the investment strategies of some companies in the wider insurance sector.

Fitch said the industry was increasingly tempted to turn to riskier assets such as equities, real estate and alternative assets in the face of persistently weak investment returns from their fixed income-dominated portfolios.

This “could ultimately have negative rating implications”, it said, without naming any particular companies at risk of downgrades.

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