Strong capitalization expected in P/C sector: S&P

The global property/casualty insurance sector is expected to maintain a strong level of capital adequacy through 2009 despite challenges presented by volatile financial markets, according to a report released by Standard & Poor's Corp. on Tuesday.

S&P analysts said the property/casualty industry "seems to be a positive outlier" compared with other industries in terms of capital stability in today's economic and financial markets. However, S&P notes in its report, "Property and Casualty Insurance Capitalization: The Pressure Is On," insurers could see their capital adequacy diminish due to investment-related volatility, declines in interest rates and poor reserve development in prior years.

S&P analysts said they think any property/casualty insurer "with significant credit risk or equity concentrations in its capital structure will likely be strained" during the recession. Further, they said companies with broad diversification and strong earnings should be able to endure extended financial turmoil with narrower capital losses.

"Nevertheless, a handful of companies may be forced to liquidate undervalued securities because of poor overall risk management in their operations," New York-based S&P analysts wrote in the report. "We believe the primary reasons these companies will have to liquidate are aggressive underwriting tasks, poor catastrophe management and the potential for inflation to wipe out reserve adequacies and quicken expected payouts."

In the report, S&P said it would be keeping a close watch on the sector's capital adequacy as the increased volatility in the credit and equity markets has affected risk-adjusted capital levels for some companies. S&P analysts added that they expect "close monitoring and testing of capital strength to remain an important component of S&P's rating analysis."

Insurers with significant long-tail commercial lines exposures "will likely remain most vulnerable" to deficiencies in capital adequacy, S&P said, "as their ability to offset underwriting losses through investment incomes has greatly diminished, unlike the soft cycle of 1990s when the investment environment was strong."

S&P went on to say that "the investment markets may remain volatile throughout 2009, and while there are few months remaining before hurricane season, it is always earthquake season—thus balance sheet risk management is key for property/casualty companies in 2009."