March 12, 2004 by Canadian Underwriter
Reinsurers may be blanching at a new “North American Insurance Industry Report Card” by Standard & Poor’s which suggests the sector can expect to see downgrades outweigh upgrades this year.
Commenting on the reinsurance sector, for which S&P maintains a negative outlook, the report says while the pace of downgrades should slow compared to the last two years, the insufficient underwriting discipline produced by reinsurers means that shareholder expectations continue to be disappointed. Citing the 100% combined ratio achieved by U.S. reinsurers in the first three quarters of 2003, S&P notes, “reinsurers currently need to underwrite at combined ratios in the low 90% range to produce an adequate ROE at the current stage in the cycle”.
Lagging equity markets and low interest rates continue to force reinsurers to focus on underwriting profit, and despite premium increases, repeated and large reserve additions are playing havoc with balance sheets. The one shining spot is the recent upgrade of Renaissance Re Holdings Ltd.
In the primary commercial lines sector, S&P notes with surprise the lack of reserving action taken in the last quarter of 2003. “S&P’s expectation late in the fourth quarter was that there would be more reserve strengthening for both the general insurance lines as well as asbestos, but to date, the feared “kitchen sink” reserving has not been realized.” However, S&P also notes with some dismay evidence of softening in the casualty line. “S&P expects an improvement in earnings for the industry in 2004 compared with 2003, but the more rapid softening of pricing could signal a less robust 2004.” While the rate expects a number of ratings to be upgraded in the short-term, it maintains a negative outlook on commercial lines awaiting evidence of sustained price strengthening.
Homeowners’ premiums continue to rise, and should do so through 2004 while at a less steep pace, and increasing deductibles are improving auto results. The personal lines sector maintains a stable outlook as a result.