S&P ups reinsurance outlook to stable

U.S. reinsurers have seen their previously negative outlook lifted to stable by rating agency Standard & Poor’s.
S&P says the upgrade is justified despite declining premiums in the primary market, as earlier rate increases earn through in 2005.
“Despite moderate premium rate declines in both property and casualty lines in recent months, profitability margins in most lines of business are expected to remain reasonable in 2005, while the pace and magnitude of reserve additions is expected to slow substantially,” says S&P credit analyst Laline Carvalho. “Thus, barring any large catastrophes, reinsurers are expected to report moderately improved operating performance in 2005.” Carvalho points specifically to a reduction in reserve additions since 2002 by U.S. reinsurers as a sign of stability.
Generally, a stable outlook means the rater expects more upgrades than downgrades in the coming year for reinsurers. However, there are many lingering issues plaguing the U.S. market, which has generally been seen as a drag on earnings for global parents. These include an “anemic” return on risk of 2.3% in the past decade, which only hit 6.4% in 2003, a peak pricing year. The impact of recent hurricane activity in the U.S. forced reinsurers to post ROR of 4% for the first nine months of 2004, with a combined ratio of 106%. Nonetheless, S&P expects the industry’s combined ratio to drop below the “magic 100%” in 2005, probably residing in the low to mid-90% range barring a major catastrophe.