Standard & Poor’s Ratings Services has revised its outlook on the global reinsurance industry to negative from stable, according to a new report published today.

The negative outlook implies that downgrades are expected to outnumber upgrades in the remainder of 2005, although the number of downgrades is expected to be modest.

“The negative outlook reflects the near-term strains on financial strength arising from the impact reported by reinsurers of the most expensive loss event in the industry’s history, Hurricane Katrina,” said S&P credit analyst Simon Marshall, in a release.

“It also reflects the uncertainties that necessarily surround the companies’ estimations of the effect of an event of Katrina’s size and type. The impact of Hurricane Rita, though likely to be limited compared with Katrina, compounds our concerns,” he added.

The impact of Katrina and Rita on financial strength is expected to be moderately negative, the rating agency said. “Concerns include the operating performance of the industry in 2005 and the financial flexibility of those wishing to raise new capital; the availability and affordability of retrocession cover for such events for the remainder of the year and beyond; and the apparent growing frequency of large loss events and the difficulties inherent in modeling and pricing such risks adequately,” S&P explained.

These concerns are partly offset by the continuation of the hard market, which Katrina and Rita are likely to ensure, and with it, the prospects for strong non-life underwriting performance in 2006 and 2007.


“Standard & Poor’s will review its outlook when the impact of Katrina becomes clearer and when the catastrophe season has run its course,” said Marshall.

The number of downgrades may be greater than expected if reinsurers’ loss estimates for Katrina prove inadequate or if additional material catastrophic events occur in the coming months; financial flexibility could become a key factor in this eventuality, S&P said.

The outlook may be revised to stable, however, if the near-term strains on financial strength are addressed and if the uncertainties surrounding Katrina are resolved, S&P added.

“The strong underlying non-life operating performance of the industry, as evidenced by a strong January 2006 renewal season, could be a trigger for a stable outlook. Also key will be the industry’s response to the challenges of writing property catastrophe business highlighted by Katrina,” S&P concluded.