Are Reinsurers Really in Trouble?

Reinsurance companies, the deep pockets into which regular insurers dig when they get into trouble, were in Monte Carlo this week, and, in between speeches, were living it up in one of the world's richest playgrounds.

Of course there were a few pessimists. Fitch Ratings, whose 2009-2010 Global Reinsurance Review and Outlook says that "reinsurers may struggle to replenish capital if they suffer large catastrophe losses in the current financial market," maintains its negative rating outlook on the whole sector.

And Moody's Investor Service, which echoes the Fitch report, says global reinsurers with weak balance sheets will have a difficult time attracting capital in the event of a big catastrophe.
But A.M. Best & Co., which focuses exclusively on insurance companies, has a totally different take. "We have a stable outlook on global nonlife property and casualty reinsurers," Vice President John Andre said to those gathered. Most reinsurer ratings will be affirmed at Best's next review.

So what's an insurer to do when even the rating agencies can't agree? Well, first off they are turning the tables and starting to rate the raters. The industry's regulators, the National Association of Insurance Commissioners, will hold a public hearing on September 24 to "discuss the past and future roles" of rating organizations. No surprise there. The rating agencies turned in a dismal, "asleep at the switch" performance during the mortgage crisis.

So will reinsurers really have a tough time getting more capital if needed? Probably not. Signs point to the credit markets improving. According to sources, American International Group is putting out feelers to do an initial public offering of its Asian life insurance operations. Insurer Fairfax Financial Holdings Ltd. said it has sold $1 billion in stock to fund the purchase of the Odyssey Re Holdings Corp. shares it doesn't already own.

Catastrophe bonds, an alternative to reinsurance, are beginning to burgeon. Catastrophe bonds pay interest to bondholders when there are no hurricanes or earthquakes of a certain magnitude, but are used to pay off insurance claims if there are.

As for actual catastrophes: Hurricane Fred poses no real threat. The 2009 storm season is waning ... along with Moody's and Fitch's credibility.