This week saw the latest in an altogether unfamiliar trend in the reinsurance market. Bermudian insurance and reinsurance firm Alterra Capital was upgraded to A from A- by Standard & Poor’s (S&P) after making a success of the merger between Max Capital and Harbor Point and proving its enterprise risk management is strong.
This follows AM Best earlier this month upgrading Tokio Millennium Re to A++ (its top rating), Swiss Re regaining its AA- rating from S&P in October and Greenlight Re being upgraded to A from A- by AM Best at the end of September.
Since the entire industry was re-rated in the early 2000s as a result of September 11 and equity market volatility, downgrades have been far more common than positive news from rating agencies. So it says much about the strength of the industry at the moment and its ability to weather more than $70bn of insured losses so far this year – and still counting – that some important upgrades are happening at all.
These upgrades were all for different reasons – Alterra’s was down to a successful merger, Tokio’s because of a strong parent, Swiss Re’s was a return to form after taking a beating from the financial crisis, and Greenlight was rewarded for successfully building the firm from scratch – but it is heartening nonetheless that upgrades are being given at all, given the punishing year for catastrophes and anaemic increases in pricing in general.
However, do not expect a glut of rating upgrades to follow these. These recent actions appear to be exceptions rather than a part of a wider movement.
Downgrades appear more likely in the near future. Heavy cat losses have brought rating agency scrutiny and negative outlooks for some firms that were disproportionately hit. The most prominent of these is Flagstone Re, with AM Best and Fitch reviewing its A- ratings and Moody’s doing the same for its A3 rating. A downgrade of any of those would plunge Flagstone to the triple-B range, a tricky place to come back from. The reinsurers’ recent restructuring efforts, including exiting Lloyd’s, may help but raters are likely to want to see how the process goes for a while first.
Other firms’ ratings are also under threat. PartnerRe’s AA- rating from Standard & Poor’s and Aa3 rating from Moody’s are both on negative outlook , though its A+ AM Best rating and AA- Fitch rating are on a stable outlook. Platinum Underwriters was put on negative outlook in August by S&P, which rates the Bermudian firm A, though AM Best has a stable outlook on it’s a rating. It is not just Bermudian firms under scrutiny. For example, Lloyd’s insurer Amlin was put on negative outlook by Moody’s in September . Amlin’s Lloyd’s syndicate is rated A1 and its Swiss reinsurance unit is rated A2 by the rating agency.
Rating agencies do not necessarily even agree on the direction of ratings for individual firms. For example, AM Best has a negative outlook on its A rating of Alterra, a result of the recent departure of its reinsurance CEO John Berger to set up Third Point Re.
All of which means the reinsurance industry can take heart from the recent upgrades but they still remain by far the exception than the rule.