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Agencies: Sector ‘stable’ but 2013 earnings face squeeze

As the global reinsurance industry prepares for its annual gathering in Monte Carlo, rating agencies agree that the reinsurance sector is on a "stable" footing but have collectively warned that results may be squeezed next year.

Low interest rates, pricing pressures and questions over the sustainability of prior-year reserve surpluses will put pressure on results and place the spotlight on underwriting capability, the agencies said.

But Fitch Ratings said reinsurers' earnings will probably bounce back in 2012 because of the benign cat season to date. This would drive a further strengthening in the market's capitalisation, assuming there are no major cat losses over the next quarter.

Standard & Poor's (S&P) estimated that large global reinsurers collectively carried excess capital of roughly $25bn at the start of the year, while AM Best calculated a premium-to-surplus ratio of between 0.8 to 1 for the reinsurance market.

Moody's estimated that $6bn of new alternative capital has entered the sector since 2011, raising the total available to $34bn. Because of the low interest rates and dwindling prospects in casualty, the capital is being directed towards cat risk, it said.

However, the agencies agreed that despite surplus capital, reinsurers have displayed more caution and discipline in selecting where to deploy financial resources.

There has been a move towards non-proportional cover, and underestimated regions like Asia-Pacific have seen capacity more tightly controlled where technical pricing or terms and conditions were not up to standard, Fitch said.

Reinsurers have also held back on share buybacks to a greater extent than previous years.

Looking forward, AM Best said continued pricing improvements are envisioned in property catastrophe, with casualty rates stabilising.

Fitch assumes continued premium growth in 2013, although with a slowing of pricing momentum and an underwriting cycle that remains fragmented.

The agency said reinsurance supply is expected to exceed demand across the majority of classes over the next year, resulting in reduced overall price increases at the key 1 January 2013 renewal.

While it is unlikely to occur, S&P said a market turn could be caused by the combination of a catastrophe causing losses across property and liability lines with an event that causes lasting financial markets dislocation and simultaneous claims inflation or legislative changes.

Fitch now estimates that it would take a single loss event of $60bn to trigger a negative outlook revision - up from $50bn - given the industry's strong balance sheets.

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