S&P predicts further downgrades

The U.S. p&c market can expect to see further ratings downgrades when fourth quarter 2002 results are released in the coming weeks, says Standard & Poor’s.
In a presentation to investment and brokerage communities, S&P said that despite price hardening, troubling losses in certain lines and the continued malaise of the investment markets signal ongoing difficulties for insurers.
“This is not going to be a pleasant fourth quarter, says Mark Puccia, a
managing director in S&P’s insurance ratings. “Inevitably, there will be surprises that are likely to cause rating actions.”
He went on to say that the industry still has not seen the error of its ways in terms of the undisciplined underwriting that resulted in its current financial doldrums.
“There’s a generation of underwriters that have never seen combined ratios below 100,” says Puccia. “The industry needs a combined ratio in the low 90s.”
Insurers continue to pay for the underwriting sins of the late 1990s, and many still do not have appropriate reserves, despite five quarters of reserve strengthening, S&P concludes. “For companies that haven’t ponied up, to the extent we estimate they are underreserved, we make a dollar-for-dollar deduction from the capital level we use in deciding the rating,” fellow S&P managing director Bob Partridge says in explaining how under-reserving could lead to downgrades.
On the whole, however, he notes that the industry remains strong, and overall highly rated. S&P’s negative outlook for the industry reflects only near-term prospects.