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Fitch goes stable on reinsurance as capital concerns ease

Rating agency Fitch said its concerns over reinsurers’ ability to tap capital markets following a significant catastrophe have “sufficiently eased” after revising its outlook on the global reinsurance sector from negative to stable.

A benign US hurricane season, narrowing credit spreads and continuing improvements in capital and debt market conditions spurred the change. It is the first upwards revision since Fitch assigned negative outlooks to all insurance sectors during the course of last year.

And Fitch said it believes that many reinsurers will consider share repurchases as the preferred way to deploy capital in the near term, given its expectation for limited premium rate increases for the foreseeable future.

Reinsurers choosing this strategy “generally have capital levels sufficient to carefully implement repurchase plans while retaining their current ratings”, the rating agency added.

The Insurance Insider predicted a return to active capital management in its October issue. The November issue, out now, highlights the flurry of share repurchase announcements by (re)insurers in their Q3 results, including significant buybacks by companies such as Munich Re, Travelers and Arch.

Macroeconomic conditions have “stabilised enough to support a stable rating outlook”, with marked improvements in asset values over the last six months, the ratings agency added.

With capital bases returning to 2007 levels, Fitch said reinsurers’ “resilience in comparison with primary market peers” together with the “lack of practical alternatives to reinsurance, including limited activity in the insurance-linked securitisation (ILS) market” continues to place the sector in a strong competitive position to provide capacity for insurers.

Nevertheless, after posting strong results in the first nine months of the year, Fitch said it views the reinsurance sector’s profitability and capital formation as “susceptible to downward pressure on premium rates and less favourable reserve development trends”, albeit within normal cyclical expectations.

In the first nine months of 2009, net premiums earned by the 23 reinsurers included in Fitch’s universe increased 2.5 percent compared with the prior-year period. But while the agency believes that modest rate increases in property-catastrophe lines are likely at the key 1 January renewal, rates in casualty lines, particularly in the US, will remain under pressure.

According to Fitch, this downwards rating pressure is influencing equity investors’ expectations and contributing to reinsurers’ low price-to-book ratios. The average price-to tangible book value of 16 publicly traded North American reinsurers followed by Fitch was 0.88x at 30 September 2009.

This compares with a high over the last five years of 1.49x and a year-end 2004?2008 average of 1.21x.

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