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S&P Continues Its Negative Outlook for P/C Industry

Posted on 13 Jan 2009

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In a report released on Monday, Standard & Poor's Corp said that its maintaining a negative outlook for the U.S property/casualty industry into 2009, indicating during the next 12 to 18 months it expects downgrades to exceed upgrades in the sector. The New York-based rating agency added that its primary concern is insurers’ “rapid deterioration” of underwriting profitability.

“The pricing cycle for commercial property/casualty insurance has been unfavorable to insurers for the past three years, especially in casualty lines,” S&P analysts said in their report, “Industry Report Card: Outlooks on Most North American Insurance Sectors Negative in 2009.” If the trend continues it “could reduce underwriting results for some companies to the point that operating performance no longer supports their current ratings.”

In addition to diminishing underwriting profits, S&P reported that the heightened level of investment risk due to the declining equity and credit markets is another unfavorable trend in the industry. The agency notes that most property/casualty insurers traditionally pursue conservative investment strategies compared with other financial institutions, but declines in asset values have “been substantial” and have dented the capital of most insurers.

S&P’s reinsurance market outlook is less bleak, though the rating agency said reinsurers have also taken hits on the financial side of the balance sheet as well as the liability side, with large catastrophe losses from hurricanes Ike and Gustav in 2008.

Due to the capital the sector has built up in previous years, S&P said it has “not yet seen the need to take widespread negative rating actions,” but adds that the segment has little margin for error.