Fitch Adopts Negative P/C Outlook

September 15, 2000

It’s not hell-in-a-handbasket yet, but the outlook for the property and casualty industry is far from good. On Thursday, Fitch, the international rating agency formed through the June merger of Duff & Phelps Credit Rating Co. and Fitch IBCA, revised its near-term ratings outlook for the U.S. property/casualty industry to negative from stable.

The deterioration of results among many insurers with marginal financial strength is outpacing improvements being made by stronger companies, according to Fitch analysts.

“In the next 12 months, we expect a greater rate of downgrades than upgrades,” said Keith Buckley, managing director of Fitch, who moderated a teleconference call Thursday afternoon. Buckley said the rating agency has downgraded eight companies this year while upgrading only three, reflecting continued poor underwriting results in the P/C industry.

In January, Fitch analysts predicted the industry would record a 106 percent combined ratio for 2000. Revised predictions released Thursday show the industry’s combined ratio will be closer to 110 percent or 111 percent, based largely on a first-half ratio of about 109 percent. Buckley added that rate increases will likely not outpace adverse reserving taking place with a number of companies.

Jim Auden, senior director at Fitch, said that in addition to struggling insurers Reliance Group Holdings Inc. and Frontier Insurance Group Inc., which have both taken charges to boost reserves this year, the potential that other companies will do the same is high.

In commercial lines, Auden said reserving deterioration is particularly bad in the workers’ comp segment where “there is the potential for some explosive reserve action in some cases.”

He referred to personal lines as “abysmal,” saying it is very unprofitable at a six-month combined ratio of 110 percent versus earlier 2000 predictions of 105.5 percent. Most of the problems, he continued, are taking place in the auto segment, particularly non-standard auto. “The rising loss costs plus rate wars over the last few years have made this area particularly bad,” he said, adding that no near-term improvement can be seen.

Auden also felt that the 110 combined ratio should be considered the “floor” for how personal lines will finish off the year, saying that any catastrophe losses in the third or fourth quarters will force the combined ratio even further upward.

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