FOCUS: Agencies Warn Of Downside For Reinsurance Prices

Of DOW JONES NEWSWIRES

MONTE CARLO -- Credit rating agencies warned Monday that prices for reinsurance cover, which have been rising strongly in recent months, could begin to dip again before some of the industry`s big names have fully repaired the damage from the previous downturn.

Speaking at the start of a three-day industry conference in Monte Carlo, analysts from Moody's said leading reinsurers are still battling to strengthen balance sheets dented by losses from tumbling share prices, hefty claims related to Sept. 11 and big pay-outs on a string of natural disasters.

Moody's analysts warned reinsurers might, as a result, opt to take on more debt to replenish lost capital, adding "another layer of risk" for investors just as some reinsurance prices start to weaken.

"The European insurers have lost a tremendous amount of capital," said Lynn Exton, an analyst from Moody's in London, speaking at a news conference here. "This is an industry that in Europe relied on investment earnings to cushion poor underwriting results. Now that cushion has gone."

The warning came as reinsurers began their annual get-together in Monte Carlo designed to reinforce ties with major clients ahead of negotiations for 2004 contracts towards the end of the year.

This time, the role of credit agencies like Moody's and Standard & Poor's could dominate the agenda, after controversial donwngrades of some leading players, most notably Munich Re (G.MUV) and Employers Reinsurance Corporation, the world's biggest and fifth-biggest reinsurers respectively.

In a report issued Monday, Moody's said it's keeping its "negative" outlook on the world reinsurance industry. Currently it has negative outlook ratings on four top reinsurers - Swiss Re (Z.REI), Munich Re, Hannover Re (G.HNV) and Scor SA (SCO).

Separately Monday, S&P cautioned that prices for reinsurance cover are showing signs of "softening" in some areas, a trend that might erode long-term profits at some big reinsurers, it said. In particular, it said Munich Re could suffer a ratings downgrade if it doesn't raise more capital.

"If Munich Re doesn't do capital raising, we would probably have to revisit the rating," said S&P analyst Nigel Bond.

Over the past two years, almost all the world's biggest reinsurers have seen their credit ratings downgraded as their capital reserves have been eroded by shrinking equity portfolios and rising claims. In mid-2001, five of the world's top 20 reinsurers enjoyed a triple-A rating. Now there's only one, the U.S.'s Berkshire Hathaway.

In its comments S&P said the slew of downgrades would at least give reinsurers "some breathing room," with the agency's view of the reinsurance industry "nearing stability."

A sharp jump in premiums over the past two years has improved earnings from the core business of underwriting - effectively writing insurance policies for insurers.

But in recent months fears have been growing that the recovery is too slow and premiums have started to fall again before some reinsurers have managed to restore their capital reserves.

Last month, the French reinsurer Scor posted first-half earnings short of analysts' expectations, while Germany's Munich Re slumped to a surprise second-quarter loss.

-By Simon Clow, Dow Jones Newswires; +33 1 4017 1740; simon.clow@dowjones.com

Updated September 8, 2003 6:47 a.m.