Reinsurance Rates Stable

Willis Re -- the reinsurance wing of the Willis Group Holdings (WSH - Analyst Report) -- has published its latest renewal report this morning, which asserts that the July 1 reinsurance renewals witnessed adequate capital and a stable pricing. This negated assertions in the reinsurance market that the July 1 renewals would see a radical increase in rates. The rate forecast came on the back of strong underwriting margins that reinsurers would have needed to cover their investment losses in the last 12 months.

Significant investment and catastrophe losses incurred by both primary insurers and reinsurers over the past year have resulted in an industry-wide capital decline. These events have eroded the excess capital from the market, which had in the past resulted in significant softening of rates.

However, in the first half of 2009, the reinsurance industry has not experienced any major underwriting losses. Also, there are some early signs of recovery in the financial sector. In addition, reinsurance companies took some desperate steps in the early part of 2009 to curb any significant deterioration in their balance sheets.

We also remain concerned about the primary insurance market, where there is still an absence of meaningful rate increases. Further, in the U.S. Casualty market, some new insurance companies are entering and thereby bringing in more capital in the industry and resulting in significant rate competition.

Though companies such as Everest Re (RE - Analyst Report), Ace Limited (ACE - Analyst Report) and Montpelier (MRH - Analyst Report) have experienced rates increases this year; we believe that this "sufficient availability of capital" in the market will restrict any hefty rate increases in the industry and hence confine the top-line growth of the companies. As such, we continue with our Hold rating on the shares of RE, WSH, ACE and MRH.