Good news alert: the U.S. property/casualty insurance sector “has been dealt a good hand” and remains stable due to smart choices and a little bit of luck, Standard & Poor’s said in a new report.
“The sector has foresight regarding the challenges ahead,” S&P said. “This resistance fortifies the continuation of our stable outlook on the U.S. P/C insurance sector, indicating our expectation of a relatively balanced number of upgrades and downgrades over the next 12 months.”
The rating agency said that the sector has benefited generally from “benign catastrophe events and improving frequency loss-cost trends,” factors that have lead to the growth of excess organic capital and an abundance of reinsurance/third-party capital. Sensible industry responses to this trend have prevented problems, S&P noted.
“Such a windfall could have set the stage for irrational pricing had it not been for the industry’s staunch focus on underwriting discipline and optimization of data analytics,” the report explained. “Moreover, the prolonged low interest rate environment has not propelled the sector to chase yields with riskier asset allocations, raising the importance of underwriting profitability.”
There are a few hiccups ahead, however, S&P said. The report noted the sector must improve its combined ratio by three points for every 100 basis point in its investment portfolio yield.
“It is only a matter of time before the 10+ year track record of reserve releases turns a fateful corner,” the report said. “S&P Global Ratings believes that insurers have released most of the redundant reserves they built up during the hard market years of 2003-2007, and time will tell if reserve release from more recent accident years were premature.”
Over the next year, S&P expects M&A deals to continue at a slower pace. It also sees stable outlook for many companies. According to the ratings agency, 85 percent of its ratings had stable outlooks as of May 20, 2016, with an additional 6 percent producing positive outlooks.
“This indicates we do not expect to take any negative ratings actions on more than 90 percent of our rated U.S. P/C customers,” S&P said.
Source: Standard & Poor’s