Despite ongoing soft market conditions, declining statutory surplus and “unsustainable levels” of reserve releases, the U.S. property/casualty industry will maintain a stable outlook for 2016, according to Tracy Dolin-Benguigui, director, Standard & Poor’s Ratings Services.

U.S. P/C insurers have an average rating of “A” and S&P is maintaining a stable outlook for both personal lines and commercial lines in 2016, she said, noting that few ratings changes are expected.

Speaking during a recent S&P webcast, Dolin-Benguigui explained the key factors that support S&P’s stable outlook. (The webcast also covered global reinsurance, which will be covered in an article tomorrow).

First, she said, the industry has very strong capital adequacy, although it reached a peak in the fourth quarter of 2014.

“There was a multi-year upward swing, beginning in the second quarter of 2011 when industry statutory surplus rose to $559 billion,” she said.

“We’ve seen that starting to decline,” she added, pointing to the fact that surplus dropped by $11.4 billion during the first nine months of 2015 to $664 billion, “largely because of unrealized capital losses of $22.7 billion and higher dividend levels, which was somewhat offset by strong earnings.”

“We’ve also seen relatively conservative investment portfolios,” although some companies are taking “more risk on the margin.” Nevertheless, she emphasized, “they’re not changing their overall investment guidelines.”

She said that S&P is not overly concerned about soft market pricing, which has not led to negative rating actions thus far, partly because of insurers’ focus on underwriting profitability. “[U]nderwriting portfolios are stronger than ever, reinforced by stronger data analytics, making corrective rating actions less necessary.”

Overall S&P expects about a negative 5 percent to 0 percent pricing movement in 2016 depending on the line of business, she added.

Catastrophes have been somewhat quiet over the last couple of years, which makes earnings less predictable, she indicated. “But we take that into our expectations, with catastrophes contributing 4 to 5 points of the industry’s overall combined ratio.” (After the webcast, she explained that 4-5 catastrophe points is considered “normal” experience for the industry.)

While S&P does not think the current levels of reserve releases are sustainable, Dolin-Benguigui said that the ratings agency still believes the industry’s reserve position is adequate.

“This industry has consistently released reserves over the last 10 years,” she said, which compares to a five-year period of reserve strengthening.

“While improved underwriting and data analytics explain the trend,” Dolin-Benguigui said, S&P is keeping a close eye on some lines of business. While S&P does not think the current levels of reserve releases are sustainable, Dolin-Benguigui said that the ratings agency still believes the industry’s reserve position is adequate.

“This industry has consistently released reserves over the last 10 years,” she said, which compares to a five-year period of reserve strengthening.

“While improved underwriting and data analytics explain the trend,” Dolin-Benguigui said, S&P is keeping a close eye on some lines of business that are having some worse than expected claims trends, such as liability occurrence lines (including excess casualty and construction liability), medical malpractice and commercial auto.

She said the industry’s ratings “are well within the stable outlook range at 83 percent,” with another 4 percent having a positive outlook. “We don’t expect to take any negative rating actions on close to 90 percent of our rated US P&C insurers.”

Tomorrow’s article will cover the comments of Taoufik Gharib, director, S&P, who provided the 2016 outlook for the global reinsurance industry.