A.M. Best Co. announced that after completing an assessment of the U.S. and Bermuda reinsurance markets, it is extending its negative outlook for 2006.
Best said it “anticipates that there will be few if any rating upgrades or positive rating outlooks assigned in 2006. Although there were a number of rating downgrades in 2005 and, currently, only a few reinsurers in these sectors hold ratings with negative outlooks, A.M. Best believes that the underlying stability of these markets remains tenuous.”
Best also indicated that it believes “the U.S. and Bermuda reinsurance sectors remain susceptible to pricing competition as investor expectations for double digit returns run high. Should the currently perceived market opportunities in property not be significantly realized, the companies that received much of the new capital that recently flowed into these markets might be forced to find alternative strategies.
“The markets have already demonstrated that while property rate increases attained for January 2006 renewals were favorable, they were nonetheless narrowly focused and limited to those covers affected by recent losses. Casualty business has seen little if any benefit from the hurricane losses in 2005. Should companies seek to diversify the new capital into casualty, it could trigger additional softening for the casualty segment as well.”
Best also points out that “another active storm season in 2006 or further reserve development from the 2005 storms, as some are predicting, would be material and may help to prolong the hard property market, but at an additional cost to earnings and capital. The financial flexibility of some companies is already stretched with debt to capital for the industry at an all time high. While common equity has previously flowed into the market with relatively little resistance, A.M. Best questions if another year of losses will dampen investors’ appetites for a stake in insurance and reinsurance holdings.
Best also noted that as a result of the hurricane losses in 2005, it “has and will continue to take a more rigorous approach in its due diligence as regards the evaluation of companies’ capitalization and risk management controls. Catastrophe models will continue to be valuable tools for the quantification of risk, but not the only barometer. Management will need to demonstrate confidence in the data and parameters employed throughout the modeling exercise.
“Further, management needs to better demonstrate that underwriting and risk controls are adequate to ensure that there is a clear understanding and controlled correlation with un-modeled exposures. To that end, A.M. Best will be requiring more detailed information through its supplementary rating questionnaire and in company meetings.”
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