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May 30, 2014

 A 30-Year Retrospective On The U.S. Insurance Industry

Much has changed in the U.S. insurance industry in the 30 years that we have been holding an annual conference that explores the latest developments in this ever-evolving industry. Many big names from 30 years ago are still around, many have changed strategies significantly, and many are gone altogether following waves of consolidation. Many transformations have also occurred in how the insurance business is done. Technology has fundamentally altered many aspects of day-to-day operations and risk management. Distribution has shifted to new methods, such as a telephone operator or website rather than a friendly hometown agent. Regulation has been modernized--somewhat--with the addition of risk-based capital, greater use of stochastic testing, and higher focus on risk management. But has all of this improved the industry? Not entirely. Although ratings on insurers have remained high among sectors that we rate, they have declined on average during the past 30 years.

 Farewell, Discontinued Operations: U.S. Financial Statement Analysis Just Got Harder

The segregation of discontinued operations from, and therefore the reporting of, continuing operations in the income statements of companies is a helpful aspect of financial reporting. By separately reporting the results of discontinued operations using a sufficiently low threshold for inclusion, companies effectively recast their historical income statements on a pro forma basis for disposal activities, making trend analysis and forecasting easier. A newly issued U.S. accounting standard is raising the threshold as to what qualifies as a discontinued operation, so that fewer disposals will be reported as discontinued operations. As a result, "continuing operations" likely will be tainted by the results of dispositions that no longer meet the higher threshold, thereby providing less relevant historical financial information and potentially hampering analysis. Financial-statement users will have to rely on management to provide needed information that may not be disclosed under the new rules to make their own pro forma adjustments.



Multimedia

U.S. Homebuilders And Building Materials Companies Hold Up Well Amid A Slow Housing Recovery

Matthew Lynam, Director
Maurice Austin, Associate Director

Standard & Poor's ratings outlook for the U.S. homebuilding sector and building materials companies remains broadly stable with a positive ratings bias, supported by our expectations for a continued favorable, but uneven, national housing recovery. In this CreditMatters TV segment, Standard & Poor’s Director Matthew Lynam and Associate Director Maurice Austin discuss the factors that contributed to this outlook.


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Sovereigns

Latvia Long-Term Rating Raised To 'A-' On Strong Growth And Fiscal Performance; Outlook Stable

The upgrade reflects Latvia's strong economic performance, which we expect will continue with output growing by 4% on average over 2014-2017. The upgrade also reflects that the external performance has been better than we forecast, as well as our expectation of continued prudent fiscal policies supporting a modest decline in government debt as a percentage of GDP. The stable outlook balances these strengths against some external risks, such as the high level of nonresident deposits, as well as longer-term challenges, such as a declining population. The Latvian economy grew by 4.1% last year: the fastest growth rate in the EU. Growth was mainly supported by robust consumption performance on the back of falling unemployment. We expect growth to decelerate to 3.7% in 2014 before picking up to average 4.3% over 2015-2017.

Financial Institutions

After A Strong Postcrisis Showing, Can U.S. Nonbank Auto Lenders Handle Rising Competition?

The auto lending market has grown significantly over the past few years as banks, captive finance companies, and nonbank specialty lenders have increased competition for auto loans. Not only have yields on auto loans fallen significantly, but lenders have also extended the terms of their loans and have allowed car buyers to borrow higher balances. Lenders have also increased their appetite for leases, an asset class vulnerable to falling used-car prices. These trends could lead to higher losses and weakened profitability in a few years, especially if loan rates continue to fall as the strong used-car prices of the past few years likely decline toward more normal levels. Because of these potential risks, we don't expect to upgrade many nonbank auto lenders in 2014 and 2015.

Financial Institutions

 For U.S. Regional Banks, Margin Pressures Continued To Weigh On Earnings In The First Quarter

The U.S. regional banks with assets under $50 billion that we rate reported relatively stable earnings in the first quarter overall, compared with fourth quarter, in line with our expectations. Despite steady earnings, less than half posted higher income because earnings remain weak as a result of increasing competition for loans and persistent low interest rates. Still, the return on average assets was adequate at 88 basis points. Net interest margins continued to compress because lower loan yields, increased investments in generally lower-yielding securities, and the shorter first quarter worked against the benefits of improving deposit costs and higher balances of earning assets. Noninterest income remained under pressure, reflecting continued weaknesses in mortgage refinancing volumes. That said, continued reserve releases buttressed earnings (albeit at a slower pace than in previous quarters).

Corporations

BioScrip Inc. Downgraded To 'B-' On First-Quarter Performance, Outlook Stable; Debt Ratings Also Lowered

The ratings on BioScrip reflect its "highly leveraged" financial risk profile and "weak" business risk profile. Our assessment of BioScrip's financial risk profile reflects our expectation of continued negative free cash flow generation through 2014, and strained credit metrics, particularly funds from operations (FFO) to debt. Following the first quarter $200 million debt refinancing, sale of its home health business for $60 million, and depressed EBITDA margins, we expect leverage to be over 8.0x and FFO to debt less than 3% through 2014. The "weak" business risk profile reflects the company's narrow focus in the infusion services market and challenges in managing costs and working capital of an expanding business. Our assessment of BioScrip's financial risk profile also reflects its strained FFO to debt of less than 3%.

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Events

Standard & Poor's Ratings Services 30th Annual Insurance Conference
June 3
New York


Health Care 2014: A New Frontier Emerges
June 3
New York


A Review Of S&P's Sovereign Defaults And Rating Transition Data, 2013 Update
June 4
Webcast and Q&A


Hot Topics in Public Power and Electric Cooperatives
June 4
Chicago


Hot Topics in Public Power and Electric Cooperatives
June 5
Boston


Prospects For U.S. Transportation Companies Improving
June 6
Webcast and Q&A


Affordable Housing Hot Topics Event
June 10
New York


U.S. Housing Recovery: Are We There Yet?
June 11
Webcast



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