Although the economy appears to be brightening, the insurance sector in North America will remain on a negative outlook, according to a report from Standard and Poor's Ratings Services.
Although the economy appears to be brightening, the insurance sector in North America will remain on a negative outlook, according to a report from Standard and Poor’s Ratings Services.
Downgrades will continue to outnumber upgrades for the next six months to a year, the ratings agency said in a report today. The report, “Outlook Remains Negative for Most North American Insurance Sectors,” was written by a team led by primary credit analysts Kevin Ahern and Neil Stein.
The life insurance industry in the United States will maintain its negative outlook. The cost of capital has slowed growth at many life insurers, while downward markets have battered their investment portfolios and earnings.
Nevertheless, the sector has its strengths, according to the report. Most insurers have the capital necessary to support their ratings levels and can meet obligations.
S&P expects that downgrades in the U.S. life insurance sector will be limited to one to two notches, but it noted that a slide in the economy that goes beyond the agency’s assumptions could eat away at insurers’ credit quality and possibly reduce ratings even more.
Ratings outlooks remain negative for the property/casualty and health insurance sectors in the United States. On the property/casualty side, commercial insurers are still hurting from assets that fell in value through the fourth quarter of 2008 and first quarter this year, according to S&P.
A rebound in the second quarter helped equity values, but S&P said that it anticipates further volatility before yearend that could pressure ratings. Meanwhile, a combination of weather-related losses and inconsistent credit markets continues to hamper personal-line insurers’ net income.
Health insurance still has a negative outlook; downgrades will outnumber upgrades in the next six months to a year, S&P noted. Weak earnings profiles along with the uncertainty surrounding health care reform make the sector’s outlook less than glossy.
The one bright spot is the reinsurance sector, S&P said.
Many of the rated reinsurers ended last year with intact balance sheets, and they benefited because there were few catastrophes and an improving capital market in the first half, the ratings agency noted in its report. As a result, reinsurers’ equity positions have improved since the end of last year.
Still the key threat for the sector is the doubt that it may have problems raising enough reasonably priced capital and maintaining ratings if a $30 billion insured loss came up next year, S&P noted.
