Moody's Investors Service said continuing share buybacks by U.S. property-casualty insurers should not be a drag on their ratings, due to the industry's currently strong financial profile.
The report by the New York-based rating service also said that, given the credit environment, it expects share buyback activity to slow this year compared to record levels of the last two years.
Enrico Leo, a Moody's associate analyst, who wrote the report, said, "The combination of robust balance sheets and excellent earnings (bolstered by reserve releases and an absence of large catastrophe losses), especially in 2006-07, has led companies to re-evaluate their capital position in light of the limited growth opportunities that lay ahead in the softening pricing environment."
Insurers, he predicted, "will likely put their capital to use through sizable share buybacks, business expansion activities (new products, new geographies), and/or engaging in merger and acquisition activity."
"Despite the expectation for continued profitability in 2008–absent large catastrophe losses," he added, "share buyback activity could slow in the near term, given the current credit market turmoil."
Mr. Leo advised in a statement that "at this time, we don't expect share-buyback activity alone to lead to downward rating pressure on insurers, provided that buybacks do not exceed one years' net income and do not significantly decapitalize the operating companies."
In general, Moody's said it believes the share repurchase programs announced are contemplated within the current ratings, and also that these programs could be scaled back in the event of a catastrophe loss or other unexpected events (e.g. asset write-downs, reserve charges, etc).
"Additionally," Mr. Leo said, "the return of capital could keep some insurers more disciplined in the market and could bolster ROE [return on equity] metrics, particularly as the pricing environment softens."
The analyst added, "Some fundamental credit metrics such as financial leverage will likely be negatively affected, but we will continue to also focus on the importance of prospective profitability and interest coverage metrics in our analysis."
Over the intermediate term, Moody's said it believes the downward pressure on p-c rates, narrowing underwriting margins and return of capital will likely lower capital adequacy levels back in line with expectations for current ratings.
"We expect insurers to look for the most efficient use of their capital, but concurrently to maintain appropriate capital adequacy as they manage the dynamics of strategic and capital decisions, particularly as market conditions deteriorate across the broad P&C sector," Mr. Leo said.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.