Fundamentals remain strong for U.S. personal lines insurance carriers, according to a report published by Standard & Poor’s. This is reflected in S&P’s decision to retain a stable outlook on the personal lines sector as well as the improved outlook distribution for personal lines insurers.
“Although earnings prospects for the first six months of 2005 appear favorable for the personal lines sector–with earned premium growth, continued declining loss frequency, and lower unfavorable reserve development leading to improved profitability–signs of increased competition suggest the operating environment for this sector was approaching a cyclical peak in 2004,” noted credit analyst Polina Chernyak.
“Personal lines insurers have managed to turn adversity into strength over the past four years, emerging from a period of weak underwriting results and investment losses all the stronger for having sharpened pricing and risk management,” Chernyak added. Despite increased competition and heavy catastrophe losses in 2004, major personal lines players are expected to remain focused on profitability and a disciplined underwriting approach. But the trend of stronger pricing and higher premiums is not vigorous enough to carry the sector to a positive ratings outlook.
Looking ahead, perhaps the biggest constraint on creditworthiness in the sector in 2005 could be the possible return to a less-disciplined approach to operating results as earnings from investments increase, providing a surplus to cushion against underwriting losses. The biggest question here is whether or not the major national players, those with the competitive advantage of being able to enter new markets, will stay disciplined now that there is less pressure on them to do so. So far, the answer seems to be ‘yes.’
The report is available to subscribers of RatingsDirect, Standard &
Poor’s Web-based credit research and analysis system, at
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