S&P Warns Soft Market Could Mean Downgrades for Commercial Insurers

The U.S. commercial lines property/casualty insurance “soft” pricing cycle will likely mean outlooks on some commercial lines insurers will be revised to negative in the second half of 2008, according to Standard & Poor’s Ratings Services.

In a new article, which is titled “As U.S. Commercial Lines P/C Prices Fall Further, It’s Time For Insurers To Sink Or Swim,” Standard & Poor’s says that if price declines continue at their current pace, resulting negative outlooks on individual commercial lines insurers in the second half of 2008 could in turn lead to a negative outlook for the commercial lines sector toward the end of the year.

A negative sector outlook signals that S&P expects downgrades to exceed upgrades in the following 12 months.

Primary commercial lines pricing has been steadily declining since 2005, but until recently, the decrease has been fairly modest, and it followed a run-up in rates that began in 2001, according to the rating agency. However, in the second half of 2007, the rate of decline accelerated, and this trend has continued into 2008.

The negative impact of declining prices–combined with increasing loss costs–is compressing economic margins, and this will increasingly show up in reported earnings, S&P says. The potential impact of falling rates on earnings in 2008 and, particularly, 2009 would be the main reason for revising the outlooks on individual companies and, ultimately, the commercial lines sector. How quickly this occurs will vary by insurer and depend on the market it serves, the accounts it writes, and its competitive position relative to other insurers in those business segments.

Prices in many lines have been dropping very quickly, with some long-tail casualty lines likely to produce underwriting losses in 2008. Other lines, though suffering price declines, still should produce results close to historical norms. The position of any given company will be determined by its target market, its distribution, and its ability to manage its risks.

Although Standard & Poor’s says it continues to believe that the enterprise risk management capabilities of the industry in aggregate augur a soft landing for this cycle, there will inevitably be individual companies that are outliers in their performance.

Source: Standard & Poor’s Ratings Direct