Increases in the frequency and severity of natural disasters, in addition to the fact reinsurers are trading below book value, have made investors unwilling to inject capital into struggling reinsurers in the event of another loss-making event, Standard & Poor's (S&P) said on Tuesday.
Unprecedented first-half losses this year have thwarted any chance of strong earnings for reinsurers in 2011.
"Given that experts predict an active U.S. wind season, if another major event makes a substantial dent in industry capital, will investors be there to replenish any lost capacity?" reinsurance analysts at S&P told a pre-Monte Carlo press briefing in London.
The annual reinsurance gathering in Monte Carlo, where reinsurance executives and brokers take the temperature of the industry, takes place on September 10-11.
The top 20 most costly natural catastrophes have occurred from 1970 to 2011, with 12 out of those 20 occurring in the last 10 years, S&P said, quoting statistics from the world's second-biggest reinsurer, Swiss Re.
S&P said it would take a natural disaster that erodes 5-10 percent of the capital of the sector as a whole, for S&P to review its stable rating on the sector. The rating agency would not be drawn on how much in extra insured losses this would be.
S&P said it would take a natural disaster that erodes 5-10 percent of an individual reinsurance company's capital, or 5-10 percent of the capital of the sector as a whole, for S&P to review its stable rating on the sector. The rating agency would not be drawn on how much in extra insured losses this would be.
On Friday, rival rating agency Fitch said it would take a further $75 billion in insured losses in the next 24 months to cause a 10 percent erosion in the reinsurance sector's capital.
Reinsurers' valuations are currently trading below historical norms, while publicly traded reinsurers' have price-to-book ratios below the average, said S&P.
"The discounted stocks raise questions about the level of investor interest in reinsurers. In our view, they suggest that investors may be reluctant to reinvest in reinsurers should the need arise," said S&P in an accompanying report released on Tuesday.
But reinsurers have been finding other ways to raise funds, said Dennis Sugrue, associate director at S&P.
"We have seen an increased interest in sidecars and increased trading for Industry Loss Warranty (ILWs), which are more viable alternatives to setting up a traditional reinsurance startup company," he said.
Sidecars are specially created subsidiaries funded by outside investors, and ILWs allow reinsurers to buy protection against catastrophe losses from hedge funds.
Reinsurers have been fuelling a revival in demand for such flexible capital instruments following a flurry of major natural disasters in the first half of 2011.
The market for such structures, which allow insurers to raise funds more quickly than through traditional equity or debt, has increased as reinsurers top up their finances to take advantage of rising insurance prices.
Other alternative reinsurance products, such as catastrophe bonds — whereby insurers transfer risks associated with natural disasters to capital markets investors — are efficient ways to bring capital into the market quickly, said Sugrue.
"We believe these alternative forms of capital are not going to replace reinsurance, but are complimentary to the sector," he said.
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