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Reinsurance stable, but start-ups vulnerable: S&P


MONTE CARLO, Monaco—Standard & Poor's Rating Services has reaffirmed its stable outlook on the global reinsurance sector, but industry players—particularly the more recent start-ups—face a number of challenges, the rating agency says.

Among those challenges are potentially significant earnings volatility, said Laline Carvalho, S&P's director of North American insurance, at a press conference Sunday at the 50th annual Monte Carlo Rendez-Vous de Septembre. "There is a real concern that the world may be entering a phase of increased frequency and severity of catastrophic losses, and if this is to occur, then reinsurers may be facing even higher volatility in their earnings and in their balance sheets," she said.

Other trouble spots noted were the increasing commoditization of the business, the contraction in retrocession coverage, and the low-barrier for entry from new competitors.

However, the latest class of reinsurers that started over the past year will have a harder time achieving success relative to previous formations, Ms. Carvalho said.

These newer companies, many of which are based in Bermuda, are focused narrowly on property catastrophe and other short-tail coverage, such as marine and energy. They are offering much needed capacity in the U.S. market, especially in peak exposure areas such as in Florida and California. Some are writing European business, as well.

"If we have a higher frequency of large natural catastrophe events in the future, those will be the lines where you will see the largest losses," Ms. Carvalho said. "So the profile of these companies could potentially be very volatile."

She also noted that a thinning of the management pool has made it difficult for these new companies to hire top talent. Existing companies have made key employees sign management contracts so they cannot leave to join competitors.

"The depth and breadth of the management teams of the start up companies this time around is the weakest that we have seen among all formations," Ms. Carvalho said.

"Some of them will probably be successful; some of them will probably not," she added. "But we do think they have bigger challenges this time. The market conditions are not what it used to be."