A.M. Best: Reserve Concerns Drive Negative Outlook for Commercial Lines
By: Phil Gusman (Property and Casualty 360) January, 2014
This year should see more negative rating actions than positive due in large part to the likelihood of insurers taking reserve charges, A.M. Best says.
The ratings agency has held a negative outlook on the commercial-lines sector since 2011, and says in a recent briefing that it is maintaining that outlook for this year.
A.M. Best says its outlook “reflects the continued concerns for those commercial-lines insurers that have yet to recognize loss-reserve deficiencies in their balance sheets and for those likely to take reserve charges during upswings in the market cycle, which will result in more negative rating actions than positive actions in the upcoming year.”
Commercial insurers’ balance sheets appear capable of absorbing shortfalls in prior-year reserves, says A.M. Best, but the ratings agency believes some insurers may run into larger problems if the reserve shortfalls are too wide and difficult to overcome.
“The potential for underfunding loss reserves and its effect on insurers’ ratings remain a critical issue for A.M. Best,” says the ratings agency. “The continuation of the negative outlook largely reflects this challenge.”
Standard & Poor’s also recently addressed the industry’s reserve position, saying it does not believe insurers will continue to enjoy the reserve redundancies that have helped support earnings over recent years. But S&P maintains that the industry’s overall reserve position is adequate, and states that recent reserving troubles at QBE Ltd., Tower Group International, and Meadowbrook Insurance Group are not indicative of an overall trend for the industry.
A.M. Best says it does expect consolidated 2014 operating results for commercial insurers to be profitable, “driven by continued, although moderating, rate increases, improving macroeconomic conditions and the absence of significant catastrophe losses.”
But A.M. Best adds that continued pressure from low-investment yields remains a challenge, even if low interest rates have helped push the pricing momentum that has benefitted insurers.
Personal lines and reinsurers
The ratings agency maintains a stable outlook for personal lines, pointing to the ongoing stability in the auto-insurance line. A.M. Best recognizes the “changing landscape” in both auto (telematics and distribution) and homeowners (increasing sophistication in understanding and pricing risks), and notes that carriers will, in the longer term, either adapt or face operational and strategic challenges.
But over the medium-term, A.M. Best says carriers should largely be able to manage through challenges while maintaining robust risk-adjusted capitalization.
A.M. Best is also maintaining a stable outlook on reinsurers, citing the sector’s “strong risk-adjusted capital, discerning enterprise risk management and a slow improvement in the global-economic environment,” particularly in the U.S.
The ratings agency notes that reinsurers will be challenged by the increasing presence of alternative capital, as well as increasing retentions by primary carriers, and states that capital and cycle management “remain the keys to long-term success.”
