A.M. Best expects 2008 upgrades/downgrades to be about equal

A.M. Best says it expects the financial strength ratings of U.S. property and casualty insurance companies in 2008 to be equally balanced between upgrades and downgrades, “despite the prospect of lower operating margins due to the current phase of the underwriting cycle.”
In a Feb. 11 ‘Special Report,’ the ratings agency noted the U.S. P&C sector is on target in 2007 to post a second straight year of record profits. “The fairly recent trend of upgrades outpacing downgrades comes as the U.S. P&C industry is on course to record only its third annual underwriting profit since 1978.”
Only 3% of A.M. Best’s ratings actions in 2007 were downgrades, compared to 9% in 2003. Ratings upgrades outpaced downgrades in both 2006 and 2007.
But the industry begins 2008 facing a number of challenges, A.M. Best notes.
“Despite another year in which P/C insurers’ balance sheets were relatively unscathed by major catastrophe losses, operating earnings and profitability weren’t as robust as they were in 2006 partly because of declining premium rates and increased competition,” the report notes. “Indeed, the current, soft-market phase of the underwriting cycle has directly impacted premium growth. A.M. Best estimates that net written premiums fell 1.2% in 2007, the first annual decline since 1943.”
A.M. Best cautioned that more carriers in the U.S. P&C industry “are returning excess capital to shareholders or policyholders, potentially dampening the effects of ill-advised growth strategies, or cash-flow underwriting each of which added to the fallout during prior underwriting cycles.”