Best Says Rating Downgrades Slowed; Still Outpaced Upgrades Once Again

November 8, 2004

Rating downgrades in the property/casualty industry slowed in 2004 but continued to outpace upgrades for the fourth consecutive year, according to a special report issued by A.M. Best Co.

The basis for the majority of rating downgrades continues to be the adverse development of prior accident-year loss reserves, especially for commercial lines carriers that are exposed to longer-tail liability lines such as workers’ compensation, general and product liability, and medical malpractice. In several cases, the magnitude of reserve charges led to rapid declines in capitalization and, in severe cases, rating downgrades.

Additionally, asbestos and environmental liabilities continued to develop unfavorably, driving sizable reserve additions. In most cases however, A&E charges did not cause rating changes as A.M. Best had already considered sizable A&E deficiencies in its evaluation of capitalization. In many cases, capital declines resulting from reserve strengthening for A&E liabilities were replenished through capital market activities. On the personal lines side, rating upgrades outpaced downgrades as many insurers benefited from the hard market conditions and decreases in weather-related catastrophe events.

Rating activity during the 12-month period ended July 12, 2004, resulted in 1,733 rating actions: 70% affirmations, 27% rating changes (positive and negative) and 3% of companies placed under review. Rating downgrades, which accounted for approximately 7% of all rating activity, were impacted by reserve deficiencies and rising loss-cost trends, which offset the favorable pricing environment in some sectors.

Rating upgrades represented approximately 4% of all rating actions over the period of this report. Primary drivers for financial strength rating upgrades were cases where rating units demonstrated strengthened or continued solid capitalization, supported by the consistent generation of operating earnings. Capitalization remains a key focal point during the rating process.

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