S&P: Personal Lines Sector Outlook Stable Despite Market Softening

June 2, 2005

After experiencing its worst catastrophe losses ever (about $27 billion) in 2004, the U.S. personal lines insurance sector is showing signs of entering into a softer cycle than the hard one that has dominated the industry for the past few years, according to a report published by Standard & Poor’s Ratings Services.

The article, which is titled “U.S. Personal Lines Insurer Mid-Year Outlook: Market Continues To Soften Despite Heavy 2004 Catastrophe Losses,” says this trend is especially prevalent in the auto insurance market.

“Weakened fundamentals, declining premium rates, and rising interest rates could all affect the sector’s operating performance, but at this point, fundamentals remain sound,” said Standard & Poor’s credit analyst Polina Chernyak. “As a result, we have decided to retain a stable outlook on the personal lines sector.” A large majority of personal lines insurers also have stable outlooks.

“The personal lines sector is at a crucial point now, a point at which companies could be tempted to discount product offerings to build market share,” Chernyak added. “Similar conditions helped result in the last soft market in 1987-2001. The concern is that this trend toward weaker operating results could soon reassert itself, especially given the higher yields available on investments as interest rates rise generally in U.S. financial markets.”

At this point, the softening environment has not resulted in across-the-board rate cuts but rather greatly increased advertising expenditures and looser underwriting standards in certain corners of the market. Several years of improved pricing and more rigid underwriting accuracy are fundamental drivers of the sector’s improved operating performance and subsequent capital position. Therefore, Standard & Poor’s expects the current soft cycle to be shorter than previous ones, especially for companies with sophisticated operational tools.

The report is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com. If not a RatingsDirect subscriber, individuals may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com.

Ratings information can also be found on Standard & Poor’s public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. All Standard & Poor’s research information is accessible for 24 hours after publication on the public Web site.

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