P-C Insurer Ratings Will Fall Says S&P

NU Online News Service, Jan. 21, 1:53 p.m.EST?Unsatisfactory fourth quarter results signal that morerating downgrades are ahead for property-casualty insurers Standard& Poor's Ratings Services said today.

S&P comments that were released followed a companyconference for the investment and brokerage communities.

The firm said in spite of substantial revenue increases, currentfinancial results do not signal a clean bill of health for insurersand the numbers coming out for fourth-quarter 2002 over the comingweeks will trigger additional downgrades.

"This is not going to be a pleasant fourth quarter. Inevitably,there will be surprises that are likely to cause rating actions,"said Mark Puccia, a managing director in Standard & Poor'sinsurance ratings.

In Mr. Puccia's view, unprecedented losses in several lines ofbusiness, poor investment returns, and depleted capital levels haveall come as a reality check on the lax underwriting practices thatprevailed through most of the 1990s.

He added that all of the U.S. insurance industry has still notabsorbed how they should deal with changed conditions.

Mr. Puccia said there is a generation of underwriters who havenever seen combined ratios below 100 who need retraining so their"habit of pricing to win business, rather than making an adequaterate of return, can be unlearned."

Mr. Puccia said insurers plagued by "fragile balance sheets andinadequate reserves," need a much lower combined ratio than the 105percent achieved in the first half of 2002, to produce respectablerates of return and to restore credibility. "The industry needs acombined ratio in the low 90s."

Insurer payouts on claims and expenses should amount to lessthan 95 percent of premium income, rather than outstrip premiumincome as they usually do, he advised.

Mr. Puccia suggested this might be possible in the current arenaof robust price increases, were it not for the industry's legacy of"woefully inadequate pricing from 1997 through 2000, for whichinsurers are still paying dearly, and the gaping shortfall inreserves set aside to pay future claims."

Asbestos lawsuits, along with professional-liability business,where the magnitude of payouts has far exceeded earlierexpectations, and workers' compensation, the industry poster childfor inadequate pricing, are the worst areas of underreserving,according to S&P.

Even after five quarters of reserve strengthening, beginningwith the "kitchen-sink" fourth-quarter 2001, about one-quarter ofthe industry has not owned up to the extent of its reserveshortcomings, by S&P estimated.

This will not shield companies from rating actions, said BobPartridge, managing director. "For companies that haven't poniedup, to the extent we estimate they are underreserved, we make adollar-for-dollar deduction from the capital level we use indeciding the rating," he explained.

Nevertheless, Standard & Poor's negative outlook on the U.S.property-casualty insurance industry reflects only the near-termdirection of ratings, not their absolute level. "It's very solid,basically a very highly rated industry," said Mr. Partridge, "soit's not going to sink into the ocean."