This year should see more negative rating actions than positive ones due in large part to the likelihood of insurers taking reserve charges, says A.M. Best.
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 2014. It says its findings reflect 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.
Commercial insurers' balance sheets appear capable of absorbing shortfalls in prior-year reserves, says Best, but the ratings agency believes some insurers may run into larger problems if the reserve shortfalls prove too wide and difficult to overcome.
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 it adds that continued pressure from low-investment yields remains a challenge.
The ratings agency maintains a stable outlook for personal lines, pointing to the ongoing stability in the auto-insurance line.
Fitch Ratings recently offered a stable ratings outlook to both commercial and personal lines, taking into account improved fundamentals in the industry, but also an expected peak in the market cycle.
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