baona/iStock via Getty Images U.S. property/casualty insurers are facing declining investment values and weaker underwriting results, S&P Global’s (NYSE:SPGI) ratings arm said, prompting it to revise its view on the sector to negative from stable. Weaker credit trends are expected to continue this year, the ratings company said. The change in stance reflects negative impact of rising interest rates on capital and consequent decline in market value of fixed-income portfolios in AOCI (accumulated other comprehensive income), and negative impact on statutory capital and earnings from lower value of equity investments. It also reflects the steady increase in capital needed for business growth, higher levels of capital returned to shareholders, and weaker underwriting results due to higher natural catastrophe losses and claims costs. Underwriting performance worsened in the first nine months of 2022 to 102.3% combined ratio (incurred losses divided by earned premium) from 99.6% in the prior-year period, according to S&P Market Intelligence. S&P Ratings expects 2022 combined ratio of 101%-102%, hurt by deterioration in personal lines. The ratings firm expects personal auto insurers to continue pursuing rate increases in the mid- to upper-single digits to catch up with higher claims costs. Those rate increases, which have been slowing gradually over the past two years, will likely stabilize at 5%-7% for standard commercial lines and remain at or above loss cost trends, it said. “These expectations should lead to a modest improvement in the industry’s statutory combined ratio to 99%-101%, assuming catastrophe losses contribute about 8 percentage points to the loss ratio,” said analyst John Iten. The guidance assumes that the U.S. economy does not worsen beyond S&P’s expectation of modest deterioration in GDP of 0.1% in 2023, as the country enters a shallow recession. It expects a rebound to 1.4% growth in 2024. “While growth in property/casualty direct premiums written has generally paralleled that of nominal GDP growth, the two will likely diverge in 2023 as property-exposed lines earn in 2022 rate increases and exposure bases increase due to inflation,” said Iten. Inflation likely peaked in Q3 2022, he said, but is expected to remain high until late 2024. Commercial lines pricing will also remain favorable, further supporting a divergence in GDP and direct premiums written. S&P projected an uptick in unemployment to 4.9% in 2023 and 5.3% in 2024, which will depress workers’ compensation premiums and partially offset growth in direct premiums written. In the past year, SPDR S&P Insurance ETF (KIE) has risen 11%, outpacing the 5.2% decline in the Select Sector SPDR Financial ETF (XLF) and the 6.2% drop in the S&P 500 Index. Earlier, BMO Capital gets selective in insurance stock picks.
S&P Ratings turns negative on property, casualty insurers amid weak credit trends
by admin | Jan 28, 2023 | Stocks | 0 comments