to diversify into key European and U.S. markets in an effort to diminish the legacy of its past business concentration in Japan. Investment risk also creates uncertainty, particularly for CEEMEA’s regional reinsurers. Although many regional reinsurers choose a relatively prudent asset allocation strategy, favoring fixed-income and cash deposits, the credit quality of counterparties is often lower in emerging markets. Investment leverage, which we calculate as the proportion of higher-risk assets relative to a company’s capital base, averages 80% across CEEMEA reinsurers, but is much lower, at about 40%, for their peers in Asia-Pacific. Reinsurers often hold significant levels of sovereign debt, and sovereigns in Asia-Pacific tend to be more highly rated. Asia-Pacific also has more- developed debt capital markets, giving local reinsurers access to a greater selection of higher-quality and longer-dated debt instruments.
Resiliency In Competitive Position Has A Clear Impact On Ratings
Our assessment of reinsurers’ competitive positions in different regions indicates the impact of cyclical and structural weaknesses. Ultimately, these assessments influence our ratings: we maintain higher ratings on reinsurers in Asia-Pacific (see Table 2). Our average assessment of competitive position across the local reinsurance peer group in CEEMEA is adequate, leading to a business risk profile assessment of fair. By contrast, in Asia/Pacific, the average local reinsurer has a strong competitive position. Our assessment of business risk profiles in CEEMEA also reflects elevated country risks. We see greater financial system and political risks in some of the CEEMEA countries. Our views of business risk also take into account less-developed payment cultures and a weaker rule of law in some countries. These factors weigh on the generally lower sovereign ratings we maintain across Africa and Eastern Europe. Their smaller size leaves regional reinsurers particularly vulnerable to volatility in operating results and, ultimately, capital levels. This affects our view of their financial risk profiles. Even a relatively small loss could lead to significant deterioration in combined ratios and returns on capital for smaller players. We reflect this volatility through our view of their risk positions and financial risk profiles, which we assess as upper adequate on average
Global Reinsurance Highlights 2014
Table 1: Real-Term Growth In The Key Reinsurance Regions CEEMEA
2013 GDP growth (%)
2014 forecast GDP growth (%) 2015 forecast GDP growth (%) 2013 premium growth* (%) Average capital
Asia-Pacific
2.9 5.3 2.7 4.7 3.2 5.0 4.7 2.5
<$200 million
*Source: Swiss Reinsurance Co. Sigma Report 06/2014. CEEMEA = Central and Eastern Europe, the Middle East and Africa
Table 2: Ratings Scores For The Average Regional Insurer CEEMEA
Business risk profile IICRA
Competitive position Financial risk profile Capital & earnings Risk position
Rating Fair
Intermediate risk Adequate
Upper adequate Strong
Moderate risk 'BBB/BBB+'
CEEMEA = Central and Eastern Europe, the Middle East, and Africa.
in CEEMEA, compared with moderately strong in Asia-Pacific.
While Asia-Pacific Reinsurers Are Holding Their Own, CEEMEA Reinsurers May See Their Position Deteriorating
In our view, smaller reinsurers in CEEMEA face a more uncertain future than those in Asia-Pacific. We see little ratings upside for these reinsurers over the next three years. If reinsurers there are unable to adapt to changing market conditions and remain relevant to their clients and investors, ratings could come under pressure. In Asia-Pacific, our rating outlooks on most reinsurers have either remained stable or have returned to stable from negative since the Thailand floods. Only Thai Re—the lowest-rated regional reinsurer, at ‘BBB+’—still has a negative outlook. We rate the other Asia-Pacific regional reinsurers in the ‘A’ category, and generally
consider them to have strong business positions. In our view, they are well placed to develop their market position, despite competition from global reinsurers. Although regional insurers may gain a certain level of comfort by including highly rated global reinsurers on their panels, the same insurers are also wary of being overly reliant on a small group of capacity providers. In our view, regional reinsurers can remain relevant to regional insurers by offering day-to-day technical support, and through their unwavering deployment of resources in good times and bad.
Anvar Gabidullin, CFA London, (44) 20-7176-7047
anvar.gabidullin@
standardandpoors.com Michael J Vine
Melbourne, (61) 3-9631-2102
michael.vine@
standardandpoors.com
41 >$750 million
Asia-Pacific Strong
Low risk Strong
Moderately strong Strong
Moderate risk 'A-/A'
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