European reinsurers on stable footing: A.M. Best

After two years of downward pressure on the financial strength of European reinsurers, the market is stabilizing, says rating agency A.M. Best. That said, ratings are unlikely to return to former high levels, the rater adds
Ratings are currently supported by strong results through the first quarter of 2004, which are expected to continue through the rest of the year, as well as the partial restoration of capital levels.
However, reinsurers remain exposed to adverse development on U.S. casualty business, as well as liability concerns developing in other countries (for e.g., the asbestos “crisis” in Europe is expected to peak in 2020). At the same time, reinsurers are not holding the vast amounts of capital they once did and are more focused on the balance of financial strength and return on capital. And capital quality has been reduced overall, with capital reflecting greater amounts of debt and non-liquid investments than in the past.
Overall, despite strong results, the sector has not rebounded to the level that might have been expected. A.M. Best notes, “unless the downside of the cycle proves much shallower than in recent times, or volumes are greatly reduced, a meaningful level of aggregate ‘through the cycle’ underwriting profitability may well prove unachievable”.
The rater questions the ability of the market to stick to its guns in terms of maintaining low volumes through the soft market in the face of shareholder expectations. For some reinsurers with lingering liabilty reserve issues, the soft market could place pressure on risk-adjusted capital adequacy.