S&P: Global reinsurers strong despite 2011 losses

The global reinsurance sector was strong enough to emerge from the disaster struck year 2011 with its capital base largely intact, according to a report from rating agency Standard & Poor’s. In general S&P believe that global non-life reinsurers hold excess capital relative to their rating levels, however they do note that the level of excess capital held in the reinsurance sector has diminished because of the record catastrophe losses and also some returns of capital to shareholders.

The last ten years has seen more frequent and more severe catastrophe losses around the globe and these, combined with the challenging economic climate, have challenged the reinsurance sector. However, S&P state that reinsurers strong capitalisation, strong enterprise risk management and a conservative investment strategy have all helped to ensure that 2011 was an earnings event rather than a capital event. These strengths continue to allow some reinsurers to take advantage of current conditions. “We do not expect a bias, either positive or negative, in the direction of any rating actions that we may take during the coming year for the reinsurance sector,” commented Standard & Poor’s credit analyst Douglass Ostermiller.

The assessment from S&P is encouraging and bodes well for the reinsurance sectors ability to weather another hurricane season which is just beginning. As well as the strength of these global reinsurers, capital is flowing into the sector from the capital markets in the form of new start-up reinsurers, often backed by hedge funds, formation of new sidecars (as we saw with Timicuan Re III and AlphaCat Re 2012 this week) and the growth of the catastrophe bond market. Capital continues to knock on the door of the sector as investors seek out the attractive returns that reinsurance has to offer right now.

Some observers believe that things will get more challenging for reinsurers as the year progresses with one factor likely to be the cost and possibly also the availability of catastrophe retrocessional reinsurance cover. There are signs that this specialist line of business which provides cover to reinsurers for their peak perils could be rising in cost. The fact that the capital markets are ready to provide additional capacity is encouraging though and could counter any price rises. It could also result in a further boost for the cat bond market if catastrophe retro increases in price as issuing a cat bond may become even more cost-competitive.

You can read the full report from S&P if you are a subscriber to their Global Credit Portal.