Moody's: More P-C Downgrades May Be Coming

Moody's: More P-C Downgrades May Be Coming

Sarah Hibler, senior credit officer at Moody's and the main author of the new report, warned that there could be further downgrades in the sector if prior-accident reserves develop worse than Moody's current expectations, or if the profitability of businesses currently written turns out to be lower than expected.

According to Moody's new study on the top 50 p-c companies, "the lion's share of the reserve deficiency" is in commercial-lines carriers as well as a number of diversified companies and reinsurers. The New York-based rating agency also observed that the lines of business with largest reserve deficiencies include workers' compensation, medical malpractice, commercial multi-peril and general liability insurance, as well as excess-of-loss liability reinsurance.

Moody's also said that as of Sept. 30, 2003, the p-c industry's core reserves--excluding asbestos and environmental exposures--were short by about $30 billion. Moody's said this is significant especially for commercial-lines insurers whose balance sheets appear to be under the most stress.

However, the rating agency said that the calendar-year reserve position of U.S. companies has been improving since 2001 and that this encouraging trend is continuing.

"Looking ahead, we believe it is likely that the industry's reserve deficiency figure will decline further by the end of 2004, due to both prior period adverse development recorded in the fourth quarter 2003 and the redundancies that companies appear to be building into their 2003 accident-year reserves," Ms. Hibler said.

Moody's also forecast that, given the state of some companies' balance sheets, premium rates will remain at least adequate over the next 12 to 18 months and perhaps longer, as companies try to rebuild their depleted reserve cushions.