Softening Prices Should Start To Affect U.S. Commercial Lines Insurers' Earnings,
Nov. 28, 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, according to an article published
to-day by Standard & Poor's Ratings Services.
The article, which is titled "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. 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. This means we expect the number of upgrades
and downgrades over the next six to 12 months to be fairly balanced. We also expect
that the total number of rating actions will be low.