S&P: U.S. Property/Casualty Insurers Continue To Boost Loss Reserves For Old Business

February 8, 2005

For U.S. property/casualty insurers, periodic glimpses of rising profitability have been overshadowed by relentless price-cutting, natural and man-made catastrophes, and claims inflation. Following an unprecedented surge in losses for terrorism, asbestos, and corporate liability, however, came new hope that firm pricing would trigger a turnaround in performance that would bolster balance sheets and produce respectable earnings. And so it will, but the need to fund future claims for policies underwritten prior to 2002 casts a shadow on the industry’s recovery and rules out any rapid return to higher credit ratings, according to a report titled “Dark Clouds Linger As U.S. Property/Casualty Insurers’ Loss Reserves For
Old Business Upped Again,” which was published today by Standard & Poor’s Ratings Services.

“Behind the seemingly stellar results of 2004, the need to bolster reserves continued to swell,” said Steven J. Dreyer, managing director of S&P’s insurance ratings group. “As a result, 2004 was the sixth consecutive year that reserve additions will eat into the industry’s earnings and into our confidence about insurers’ ability to measure and manage risks. Following colossal prior-year reserve additions of $22 billion in 2002 and $19 billion in 2003, we estimate that 2004 financial statements will show that at least an additional $13 billion will be plowed back into prior-year reserves.”

S&P’s outlook on the U.S. commercial lines property/casualty industry remains negative because of continuing concerns about the need to fund reserves, skepticism about the industry’s ability to maintain pricing discipline, and uncertainties surrounding the wave of investigations into the industry’s business practices. Although 2004 will produce strong earnings, and signs are reasonably good for 2005, reports S&P, the negative outlook indicates that the industry will see more ratings falling than rising over the course of the year.

The report is available for purchase by calling (212) 438-9823 or send an e-mail to research_request@standardandpoors.com.

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