S&P Report Downgrades Personal Lines for 2009
In its recent report on the insurance industry, judging from the likelihood of sector-wide weaker operating performance, S&P has said that it has revised its projected outlook on the U.S. personal lines insurance sector to negative from stable. This sector includes automobile and homeowners' coverage.
Significant and catastrophic losses suffered during 2008 combined with lower investment income, together with significant asset and investment losses, which have been brought on by general credit and equity market deterioration, combined with reduced financial flexibility that has resulted from limiting access to the capital markets, and fears of a recession, which have the potential for affecting growth and earnings prospects, have together triggered the lowered outlook the ratings according to the agency.
The S&P repeat projects that during the next 12 to 18 months, that will be an increase in the number of personal lines companies with negative outlooks. They suggest that downgrades will exceed upgrades in 2009. The expected downgrades at this time will be only one or two notches, or as an example 'A' to 'A-'.
The S&P report projects the current economic slowdown into and through 2009, extending the difficult operating environment that insurers are facing. They state that mistakes in strategic judgment and in the execution of business fundamentals might hurt some insurers and negatively affect their ratings, and create a greater impact on the bottom line than when growth was high at a time when operating margins were more healthy.
The report also notes that the outlook for the U.S. personal lines insurance sector has not been revised since May 2002, at time at which the outlook was moved to stable from negative, the place where it had been since July 2001.
Report Also Challenges Commercial Lines
According to S&P, in 2009 commercial lines will not do much better than the personal lines sector. The ratings agency sights the ongoing price declines for commercial lines, the significant second-half catastrophic losses that were incurred resulting from such events as hurricanes Gustav and Ike in addition to the wildfires in California, added to decreased investment income, and very substantial increases in unrealized capital losses. All of this has made for tough going in 2008.
As a reflection of its position that conditions will not much improve anytime soon, S&P is continuing to maintain into the year 2009, its negative outlook for the U.S. commercial lines property and causality sector.
Year-to-date ratings changes in commercial lines have been split evenly between upgrades and downgrades in the past but S&P now expects that during the next 12 to 18 months there will be a situation where ratings downgrades will exceed upgrades in the commercial lines sector.
In its report the rating service states that its primary concern is the speedy deterioration in underwriting profitability that has occurred in 2008. The report notes that by August of 2008 prices had fallen to the point at which it was believed that the sector's favorable underwriting results from the previous three years would be turned into underwriting losses by 2009. According to the report the third quarter catastrophic hurricane-related losses have accelerated this timetable, making it now appear likely that the industry will record an overall underwriting loss for 2008.