LONDON (Standard & Poor's) Nov. 25, 2008--Standard & Poor's Ratings Services said in a report published today that reinsurers have had sufficient excess capital available to absorb the shocks of the past year, but much of that cushion has now been eroded. The report, titled "Global Reinsurance: Excess Capital Absorbs The Shock To Date; But There Is Limited Further Margin For Error," says that the excess capital built by the sector, driven by two successive years of record profitability, has enabled most reinsurers to withstand the extreme stresses applied to both sides of the balance sheet, particularly during the second half of the year. "This explains why we have not yet seen the need to take widespread negative rating actions within the sector," commented Standard & Poor's credit analyst Peter Grant.
Nonetheless, Standard & Poor's has revised some of its medium-term expectations for the sector in light of recent events. We now expect the combination of the substantial capital depletion seen to date, lower prospective investment yields, a spike in the cost of capital, and constrained financial flexibility to translate into substantial (risk-adjusted) price increases at the forthcoming January renewal. In our view, average price increases of between 5% and 10% will be necessary to enable reinsurers to rebuild excess capital to the extent we consider necessary to compensate for their loss of financial flexibility.
"Lesser price increases could cause us to change our outlook on the sector to negative, and to revise the outlook or ratings on those reinsurers that we believe to be most exposed, namely those that are either thinly capitalized relative to their current rating level or that are, in our view, excessively exposed to further declines in investment markets or concentrations of insurance risk," said Mr. Grant.