S&P Reinsurer ratings Downgrades ‘Very debatable’

London-primarily based Litmus evaluation has commented on the announcement from S&P that for the first time when you consider that 2006 it expects a bad fashion in reinsurer ratings in 2014. Of the 23 companies (such as Lloyd’s) it defines as “global reinsurers” it notes that “almost 1/2” are materially uncovered to the competition pushed dangers it sees because the probable primary cause of rating downgrades.

“everybody who has even casually scanned the enterprise media currently will now not be surprised at S&P’s purpose,” Litmus stated. “namely that poor fashion (traditional or in any other case) and decreased demand are using out ‘technical pricing’ discipline (we would upload adverse improvement chance to the ones problems however the business enterprise seems greater sanguine).”

In Litmus’ view S&P’s stance is “debatable” for a number of reasons. in the past downgrades had been made primarily based on “an inevitably clear weakening of a reinsurer’s credit profile,” Litmus stated. “but also this time S&P is indicating the threat of downgrades driven sincerely by way of its view of a reinsurer’s potential income. it's far one issue to difficulty a downgrade based on a stability sheet occasion along with a extreme cat loss, asset write-down or reserve hike, pretty some other while it’s based totally at the employer’s judgment about weakening profits ability.”

further the evaluation points out that S&P is involved about “similarly fee/phrases & conditions weak point in the course of 2014 as well as the charge discounts visible on the Jan 1 renewal. So any profits pushed downgrades in 2014 ought to nicely manifest earlier than any published figurers from the reinsurer really verify such weakening. This ‘prospectiveness’ is, of direction, a top attention of the business enterprise’s revised score standards launched remaining may additionally.

“A essential plank of this is how the relative energy of a reinsurer’s ‘aggressive position’ helps sustainably sturdy profits and it's miles this – directly or in a roundabout way – that S&P highlights as the probably supply of downgrades.”

Litmus stated it doesn’t disagree with S&P’s “simple premise,” but it does point out “a few anomalies in S&P’s take on this for the reinsurance industry.

“first of all, as we have highlighted before, the organization has had a quite advantageous view of ‘aggressive position’ across the ‘worldwide reinsurance’ cohort. only one reinsurer (Maiden Re) is presently assigned a rating for this of less than ‘sturdy’ (‘adequate’ in Maiden Re’s case).

“For a famously cyclical, highly competitive enterprise where ‘product differentiation’ is challenging to say the least this has always struck us as atypical (even though we presume that as a minimum in component it’s a judgment relative to industries visible as extra competitive nevertheless).

“Secondly scores are intended as ‘via the cycle’ views (indeed the organization’s recognition on the importance of ‘aggressive position’ displays that). So, what's it because is not a part of expected cyclicality?

“Our tackle each factors is that the agency is unnerved by way of how reports (and maybe the non-public facts it receives from rated agencies) endorse that the enterprise’s claimed diploma of attention on keeping technical pricing seems to be about as resilient as the archetypal army struggle plan (in that it has survived best up-to-the-minute the ‘enemy’ of rate-based totally opposition has been engaged).”

Litmus additionally factors out that only a few weeks in the past S&P had “simplest one” reinsurer on its “bad outlook” listing. “Outlooks are the mechanism by using which S&P commonly flags a terrible ‘fashion’ (rather than a poor ‘occasion’) that may result in a downgrade,” it explained. “The organization we agree with is therefore now awaiting a appreciably worse pricing surroundings than it predicted simply weeks ago. generally we would look to the ‘outlooks’ as a guide but, as above, the organization seems to have had a poor ‘step-alternate’ in its view that isn't but contemplated within the outlooks.”

Litmus defined that “14 of the 23 [reinsurance] companies have the ‘sturdy’ assessment for ‘competitive role’, 6 are assessed as ‘Very strong’ and two as ‘extremely strong’. a discounted assessment in most of these instances could in theory cause a downgrade, however the good judgment of S&P’s function is that it is the ones it views to have the least without problems defended ‘competitive function’ whose rating is at maximum danger. Counter-intuitive even though it would appear before everything sight, those consequently with ‘most effective’ a ‘robust aggressive role’ evaluation seem most uncovered.

“furthermore the checks for the capital adequacy a part of the evaluation (referred to as the ‘economic chance profile’ score) also replicate prospective income so a more bearish view of ‘aggressive position’ leading to worsening prospective earnings can impact this part of the analysis too, magnifying the rankings impact.”

Litmus additionally points out that S&P “stresses a standard situation about pricing discipline and, in the end, a fashionable willingness to under-price with the aid of any of the 23 groups undermines perceived competitive strength in a score evaluation. And since it is not 2013 and earlier overall performance that S&P is concerned approximately, up-coming releases of 2013 numbers might not offer a whole lot of a manual either (even though any overall performance that is materially ‘under friends’ would sincerely now not assist a group’s case).

“For S&P rated reinsurers now more than ever protecting their rating would require efficaciously speaking each precisely what their aggressive benefits are (the ‘why’ no longer just the ‘what’), persuasively arguing that they'll no longer be market share centered, and that their threat and pricing controls are strong throughout all operations. Then hope it’s a reasonably benign cat 12 months and that their earlier year reserves are ok.”