P/C Reinsurers, Carriers Consider the Capital Markets Closed

U.S.-based property/casualty insurers and reinsurers will not tap the capital markets anytime soon and will rely on their “vindicated” business model to cover risks in 2009.

“The industry comes out of the year with it’s model unbroken,” said Vincent Dowling, managing partner of Dowling & Partners in Chicago. “Banks, life insurers and brokers are in carnage. One of the great strengths about this business is that you can’t have a run on the bank here.”

P/C industry executives made their comments at the Property/Casualty Insurance Joint Industry Forum in New York on Tuesday.

Dowling said that he expects the P/C industry to end the year with realized and unrealized losses of $75 billion after starting the year with a capital base of $525 billion.

“The P/C industry did quite well on a relative basis,” Dowling said, adding that it is not subject to the same liquidity pressures as the rest of the financial services industry . “This is a business where your largest liability – your loss reserves — have no covenants and no one to force you to give the money early.”

2008 ended on a positive note despite significant losses that cut into reserves, according to Michael Pritula, director of McKinsey & Company in New York. He said McKinsey’s estimates industry reserves will end the year down 15 percent to approximately $80 billion.

“While that’s a significant number, it’s not catastrophic,” Pritula said.

Capital markets will continue be anathema to the P/C industry in 2009 because executive argue there are able to continue to cover risks conservatively without attempting to wrangle scarce and expensive cash by structuring securities.

The cost of capital is something that both insurers and reinsurers are closely watching, said Franklin Montross, chairman and CEO of General Re.

“Clearly the cost of capital is going up and the preconditions are present for a sustained change in pricing,” Montross said

Panel particptants argued that P/C companies are running their operations assuming the capital markets are closed, pushing prices up and limiting exposures creating a harder market.

Even if there was a large catastrophic event that cut into the industry’s capital base, insurers expect replacement capital would be expensive and huge strings attached.

“The only place you could argue right now where there is a pool of capital ready to jump in quickly would be private equity firms,” said Dowling. “But I expect it would be very onerous in terms of preference along with some type of conversion feature and demanding for a big chunk of the company in question”

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