S&P cut to US P&C outlook could put select caps on growth

The logic and tone of  S&P's recent move to a negative outlook for the US P&C market could put select caps on growth as H1 investment losses crank up reported leverage ratios, a key equity brokerage has indicated.

S&P has differed from the rough-and-ready ratings agency consensus that mark-to-market investment losses, tallied away from the standard P&L as Accumulated other comprehensive income (ZOCI), need not hack down solvency readings.

“While we don't necessarily believe most P&C companies should be penalized for unrealized portfolio losses from higher rates, S&P's comments leave us with the view that companies should be paying attention to reported leverage ratios (including AOCI),” analysts at Wells Fargo warned investor clients in a note on insurance.

That translates into “less flexibility” for firms to reach for new debt to fuel growth and presumably less room for some leveraged names to lean into the hard market.

Impact could be relatively widespread as Wells notes that "most companies are operating at/near the high end of leverage targets today."

First half investment losses on the rise in interest rates are only one element in the weakened outlook, S&P made clear in its late October ratings note. Rising loss trend, driven by the higher for longer inflation that triggered the interest rate move, also ranks high on the S&P worry list.

But the capital levels hit by the H1 investment losses and unsupported by eroded earnings remain crucial to eventual ratings actions.

S&P said it would "expect to make negative revisions to the ratings or outlooks of those insurers whose capitalisation has fallen materially below our expectations and whose projected earnings and capital management options, in our view, will be insufficient to rebuild capitalization to a level consistent with our current ratings over the next 24-36 months."

Insurance companies rated by other agencies might feel a bit more at ease. Wells Fargo cites its own conversation with other agencies showing "a different perspective, including an expectation for few (if any) negative ratings actions based on declining AOCI from rising rates (and corresponding leverage ratio impact)."

Dark clouds have gathered. S&P Global Ratings revised its view on the US property/casualty (P&C) insurance sector to negative from stable just one day after Moody’s turned negative on the UK’s P&C insurance sector outlook.

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.