S&P: Softening Prices Should Start To Affect U.S. Commercial Lines Insurers

November 30, 2007

Another very profitable year for commercial lines insurers, sparked by yet another exceptionally mild hurricane season, is emerging for the entire U.S. property/casualty industry, says Standard & Poor’s Ratings Services.

An article recently published by S&P, “2008 U.S. Commercial Lines Outlook: Earnings Still Strong, But Weaker Prices Should Start To Hit Bottom Lines,” says that unless there’s a major negative surprise in December 2007 earnings for commercial lines companies will approach the record-level achieved in 2006. Balance-sheet strength for most insurers, driven by higher statutory surplus and diminished concerns about reserve adequacy, will also continue to improve.

“Still, we are not popping champagne corks just yet,” S&P says. “As 2007 has progressed, we have noted with increasing concern the rate deterioration across virtually all business lines. Although the absolute level of rate decline varies substantially by source — with insurance intermediaries suggesting higher average rate declines than are the insurers themselves or insurance buyers — one thing they do agree on is that the rate of deterioration is accelerating. Although companies are still reporting strong underwriting results, in large part because of another exceptionally low year for hurricane losses and the decline in adverse prior-year reserve development, we believe that the margin compression on business written in 2007 will become more evident in 2008.”

It is primarily for this reason that Standard & Poor’s is maintaining its stable outlook on the U.S. commercial lines sector, the articles says. S&P expects the number of upgrades and downgrades over the next six to 12 months to be fairly balanced. The rating agency also expects that the total number of rating actions will be low.

Source: S&P, www.standardandpoors.com

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