11 January 2010
Published in: Capital - models, Insurance risk, Cat risk - ILS
Credit profile of reinsurers is vulnerable
The credit profile of the reinsurance industry may not be as healthy as current capital levels indicate, Moody's said in its Weekly Credit Outlook today.
The ratings agency warned that the soft reinsurance market will place pressure on reinsurers' underwriting margins and profitability. In Europe renewal rates were generally flat to down 5% for most business lines and in the US property catastrophe reinsurance rates are reported to have declined by 5% to 15%.
Robust 2009 earnings, light catastrophe losses and the sharp rebound in credit and equity markets during the second half of last year meant the equity capital position of the reinsurance industry begins 2010 at near peak historical levels, Moody's said.
However, the report noted that in the absence of a transformational catastrophic event, "we expect reinsurer profit margins to come under increasing pressure as rate decreases affect the top line, investment income drops owing to low investment yields and the impact of reserve releases, which have bolstered underwriting results in recent years, diminishes."
Given these conditions, "we believe that many firms may decide to repurchase shares to boost returns on equity. However, this course of action could result in increased vulnerability to shock losses from catastrophes, with negative implications for ratings."