Outlook Good For U.S. Workers’ Comp; State Reforms, Strong Results Factors

February 8, 2006

The outlook for the U.S. workers’ compensation sector in 2006 is good, with the ratings impact for insurers expected to be neutral on the whole, according to a report released by Standard & Poor’s Ratings Services. Underwriting results in 2005 are expected to be strong based on nine-month figures and will continue to be strong through 2006, driven by the reduction of loss trends resulting from multiple state reforms implemented over the past few years and by improving claims frequency.

Partially offsetting these benefits, however, will be expected long-term medical inflation (especially for prescription drugs), increased competition, and improving (though still deficient) reserve adequacy.

Insurers with line-of-business or geographic concentration have high exposure to the risks discussed in the report, and the ratings on such insurers are more sensitive to the market’s vagaries. For this reason, Standard & Poor’s ratings on workers’ compensation specialists are likely to be no higher than the ‘A’ rating category.

The report, titled “State Reforms, Strong Results Point To Good Outlook For U.S. Workers’ Compensation,” states that any unexpected rating changes in 2006 stemming from developments in workers’ compensation would most likely be the result of larger than expected reserve strengthening by a few insurers for prior year business (a negative factor) or better or worse than anticipated conditions in select markets in which a workers’ compensation specialty insurer maintains a business concentration.

Workers’ compensation is the second largest line of business in the U.S. property/casualty insurance market (trailing only personal auto). In addition, the segment is among the most complex lines, with a mixture of risk elements such as health care, long-tail claims settlements, and state regulation, as well as an unusually significant dollop of political influence, that do not generally affect most other insurance lines.

The report is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (212) 438-9823 or sending an e-mail to research_request@standardandpoors.com.

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