Standard & Poor's has changed its US reinsurance industry outlook to stable from negative due to improved market conditions in the sector.
Despite some rate decline in property and casualty lines in recent months, the rating agency expects most lines to achieve adequate profitability margins in 2005, while the pace and magnitude of reserve additions are expected to slow substantially. Barring any major catastrophes, reinsurers are expected to report moderately improved operating performance in 2005.
However, there remain long-term concerns over the industry's ability to sustain this positive trend. US reinsurers are still looked upon as a drag on the global market, with non-US parents regularly providing financial support to help keep their American subsidiaries solvent.
2001-2003 saw the top 20 US reinsurers report in excess of $15bn in reserve additions, nearly 70% of their original reported statutory surplus at year-end 2000.
Standard & Poor's stable outlook reflects its expectation of fewer downgrades relative to upgrades in the US market in 2005. This belief is supported by recent rating changes. In 2002, there were downgrades and no upgrades of US reinsurers. In 2003, the number of downgrades decreased to eight. In 2004, there was only one downgrade, and there were two upgrades. The recent collapse of Converium Re North America because of debilitating reserve increases reported in the third quarter is considered the exception in 2004 instead of the norm. The stabilizing trend, relative to prior years, is tied to declining reserve additions, which peaked in 2002 as well as better pricing conditions.
