Rating agency in no hurry to issue upgrades

With lingering concerns over the long-term prospects for the p&c industry, rating agency A.M. Best says it will be in no rush to issue upgrades.
The rating agency notes the record profitability experienced by the U.S. and Canadian industry in 2004, and notes that company management are eager to see upgrades of their financial strength ratings, many of which were downgraded in recent years.
“However”, the rater notes, “it would not benefit the companies or the users of ratings to upgrade a company based on the most recent three years of performance, only to follow shortly after with a downgrade due to the lack of sustainability of the improved performance as the market deteriorates.”
In its special report, “Sustainable Improvement is Key to Upgrades”, A.M. Best vice presidents Matthew Mosher, John Andre, Anthony Diodato and Karen Horvath note 2005 should again prove profitable for the industry, but “there is concern for 2006 and beyond” as prices have already begun to soften.
“Every management team has pledged to walk away from underpriced business, asserting their commitment to the bottom line rather than the top line,” the report notes. “Nevertheless, positive movement in many ratings will be unlikely in the current environment.”
The rater views many company projections for improvement beyond 2005 skeptically. Not only will companies be challenged by price deterioration, but the industry continues to face an overall reserve deficiency estimated at US$59 billion.
The expectation of continued reserve charges and deterioration in pricing adequacy have led the rater to maintain a negative outlook on both the commercial lines and reinsurance sectors.
“It is imperative that the industry work to educate its staff on the long-term impact of individual pricing decisions,” the report concludes. “Additionally, a more realistic view of potential adverse development within loss reserves must become the norm.”
The full report is in the March 28 edition of BestWeek.