Moodys Improves P-C Commercial Outlook

Moody's Investors Service announced that it has changed the outlook for the North American property-casualty commercial lines insurance sector to stable from negative.

The New York-based rating firm said its change in outlook reflects the strength of commercial insurers' earnings over the past several years, improvements in risk-adjusted capitalization, and a renewed commitment to underwriting discipline.

Moody's said the change also reflects its view that the number of rating downgrades will be small, driven by company-specific circumstances rather than industrywide fundamentals.

The strong pricing environment of the past few years has enabled commercial carriers to bring their capitalization back in line with their current ratings, although ratings have generally stabilized at a lower level, Moody's noted. Today, low "Aa" and "single-A" ratings are the norm for the majority of firms, it added.

High earnings in recent years have also enabled many firms to quietly increase their reserves for the most problematic exposures, such as U.S. casualty lines, particularly for underwriting years 1997-2002 and to a lesser degree asbestos and environmental claims, the rating service went on to say.

Commercial writers are expected to continue to strengthen their reserve positions into 2006 as deficiencies on older accident years are expected to be offset by redundancies on more recent years. However, asbestos and environmental liabilities continue to remain a significant uncertainty for the industry. While progress on federal legislation has been slow, certain states have instituted reforms that have helped insurers better manage these claims, Moody's found.

Hurricanes Katrina and Rita have caused commercial insurers to report weak earnings for the third quarter of 2005. Moody's went on to say that given the unprecedented level of both loss frequency and severity during the 2005 hurricane season, it expects commercial carriers will review both their risk management processes and risk appetite. While the hurricanes will likely cause primary and reinsurance property pricing to rise, Moody's said it believes that casualty pricing will likely be unaffected.

The service said terrorism risk remains substantial for commercial lines insurers, particularly those companies writing significant amounts of workers' compensation business.

Moody's noted that Congress is currently working on legislation that would extend the federal backstop provided by the Terrorism Risk Insurance Act. However, the rating service said that TRIA deductibles could represent a significant portion of a company's statutory capital, and as a result, it expects highly-rated commercial lines insurers to appropriately manage their aggregate exposure to terrorism risk.

Moody's said it expects to publish a full report on the U.S. commercial lines industry soon.