S&P Reports on P/C Commercial Lines Insurers; Raises Outlook to Stable

June 11, 2004

Standard & Poor’s Ratings Services announced that it has revised its outlook on the U.S. commercial-lines insurance industry to stable from negative “based on the delicate balance now in play between the positive effect of strong earnings and the perpetual drag of inadequate reserves.”

S&P’s latest report, issued yesterday, points to a “10.7 percent gain in premiums in 2003, as measured by Insurance Services Office Inc., and looks for good results to prevail through the first half of 2005 for most companies.” However, it also observes how “pricing has peaked in most business lines and has even begun to decline in such areas as property, aviation, and terrorism coverage.”

S&P pointedly addressed the industry’s age-old cycle dilemma. “The industry’s fate hangs in the balance,” the report warns. “Will it adhere to the newfound religion of pricing discipline, which would secure its future, or will it revert to historical form, sacrificing long-term profitability for the instant gratification of top-line growth, which would squander its future?”

Discussing the industry’s other major problem, reserve strengthening, S&P called it “the wound that will not heal,” in the form of perpetual shortfalls in the reserves insurers need to pay future claims. S&P’s analysis compares the impact of various business lines on reserving trends as well as total industry reserve adjustments over the past decade.

It also examines litigation trends, which remain a major industry concern. The report gives several examples in which “the gavel has struck unfavorably for insurers lately, with particular attention on developments with asbestos liabilities, silica [see following article], construction defect, and medical malpractice costs.”

It also noted that other potential problems may be on the horizon. “What is the next new hazard that we don’t know about?” asked S&P credit analyst Steve Ader. “What is the next asbestos?”

S&P said the “issues raised in this report will also be the focus of Standard & Poor’s Annual Insurance Conference from June 15-17, 2004. Held at the Grand Hyatt in New York City, the conference will bring together top insurance industry executives and investigate such pressing concerns as the role of insurance actuaries, the growing tensions between insurers and reinsurers, and the rise of Bermuda companies.” For more information, or on-line registration, go to www.events.sandp.com/insurance.

The report, entitled “U.S. Commercial-Lines Insurance Midyear Outlook 2004: Market Finds a Wary Equilibrium,” is available to subscribers of RatingsDirect, S&P’s Web-based credit research and analysis system. Non-subscribers may purchase a copy by calling (1) 212-438-9823 or by sending an e-mail to

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