More ratings downgrades forecast

Having attracted alternative capital with its potential for healthy returns in a low interest rate environment, the insurance industry is now facing the resulting challenge of declining prices and narrower profit margins.

This has been reflected in Standard & Poor’s (S&P) recent downgrading of its outlook for Lloyd’s from positive to stable—and further negative actions and downgrades are likely. That is the view of Ralf Bender, senior director, Financial Services Ratings, and Johannes Bender, associate director, Financial Services Ratings, at S&P, speaking to Baden Baden Today.

“We anticipate that around half of the rated reinsurance companies will become more affected by the current pricing pressure, and for these companies there is the potential that we will make adjustments downwards with regard to certain rating factors or in their overall rating,” said Johannes Bender.

In particular, he predicts that companies that are less diversified and more focused on price-sensitive lines of business will face the greatest challenge to withstand the current environment.

While the ratings of most of these companies will probably stay unchanged for 2014, the pressure is likely to show by 2016.

“A decline in earnings may not immediately affect ratings because companies still have very strong capital positions, often meaning they don’t need earnings to defend their current rating levels.

“However, our assumption is that if prices go down and you write pretty much the same amount of risk, you will have less premium for that risk, so it will take down the profitability at some point,” said Johannes Bender.

S&P expects that the pressure on pricing will continue, especially as private equity investors start reinsurance businesses. Ralf Bender said that the extra capacity is here for the long haul.

“We would not expect that there will be a stop to this influx of alternative capital at any time,” he said. “As interest rates improve or these investors suffer some losses there might be some reductions in the alternative capacity but we think it’s here to stay.”