S&P: North American Insurance Holding Cos. Face Challenges

In a new report – “North American Insurance Holding Companies Brace For Year-End 2007 -” Standard & Poor’s Ratings Services examines the status of the various insurance sectors: life, commercial lines, property/casualty (P/C), personal lines P/C, reinsurance, and health.

S&P’s outlook for the U.S. life insurance sector remains stable; i.e. “positive and negative rating movements” are expected to be “about equal for the next six to 12 months.”

However, S&P notes that it’s “starting to see signs that 2006’s net gain on underwriting is spurring price cuts in personal lines, as data from the federal government on trends in Consumer Price Indexes (CPI) for personal lines coverage indicates that the CPI for tenants’ and household insurance fell 0.9 percent in 2006,” while the “CPI for motor vehicle insurance rose just 0.6 percent-far less than the 3.2 percent increase in consumer prices overall.”

2006, which saw record earnings for the P/C industry, also meant that “many insurers are in their best shape since the late 1990s,” but the “moderate pricing declines observed across most lines in 2006 have not abated.” S&P forecasts that this trend will continue in 2007, leading to an “erosion in profit margins.”

In the reinsurance market the first half of 2007 became more competitive, “following a year of minimum catastrophe activity in 2006 and record profits. Prices have been declining across the board with terms and conditions increasingly under pressure.”

As far as the managed care industry is concerned, S&P expects that it will “post less-dramatic earnings increases than in the past two years, though earnings and cash flow will generally stay strong. We are seeing more balance between upgrades and downgrades, which is expected to persist for the remainder of 2007.”

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