News Analysis - Record results but the warning lights are on.

(From Reinsurance)

Byline: Janina Clark.

The adjectives "record-breaking" and "exceptional" have been cropping up with monotonous regularity in (re)insurers' comments on their second-quarter results this year. Equally, predictions of a continuing strong market into next year and even into 2005 have been thick on the ground, despite reports that rates in certain lines, particularly property, are starting to flatten.

Standard & Poor's (S&P), however, does not share the reinsurers' positive view. The rating agency's early August 'industry report card' on North America's reinsurers maintained a negative outlook for the sixth successive year. By negative outlook, S&P means that the number of financial strength ratings lowered in the short to medium term is likely to outweigh the number that are affirmed or raised.

"The market continues to suffer from diminished quality of capital, reduced financial flexibility, prior-year liabilities, the overhang of reinsurance recoverables and the likelihood that many companies' operating performance will fall short of expectations," says S&P analyst Laline Carvalho.

The ease of entry of new players into the market (see page 8) has "dampened the ability of existing players to recover", says Ms Carvalho. "Recovery remains the watchword. The industry must build on the hardening of rates and the tightening of other terms and conditions that started in early 2001."

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