Best Maintains Stable Outlook on U.S. Personal, Commercial Lines Sectors

The rating agency A.M. Best Co. said it continues to view the outlook for both the U.S. personal and commercial lines markets as stable.

Despite the ongoing soft period in the cycle in commercial lines, a contracting economy and the existence of a financial market crisis, most key indicators suggest commercial lines rates will continue to be soft and competitive well into 2009, Best analyst say. However, the continued turmoil in the financial markets together with credit tightening and low investment yields has many believing that the end of the soft market could be near, according to the analysts. In 2009, Best expects an overall slowing of rate decreases and a flattening of rates for most commercial lines of business.

“For the vast majority of commercial lines insurers, investment impairments and mark to market adjustments have been manageable, as balance sheets remain relatively intact with capital levels that remain appropriate for their ratings,” Best wrote. “On the other hand, earnings prospects for commercial lines insurers are likely to be dimmed by slower growth and less business opportunities via lower payrolls (unemployment / construction) and a decline in gross receipts (slower economic growth). Weaker investment earnings and moderating cash flows are also likely to impact future earnings prospects for commercial lines insurers due to the decline in new money yields.”

Best does not expect commercial lines insurer rating actions to move profoundly in one direction, with the number of upgrades/positive outlooks and downgrades/negative outlooks to be fairly balanced over the next year. Analysts also said the overall commercial lines segment will continue to maintain adequate balance sheet strength, profitability and liquidity in 2009. Also, with a modest semblance of stability, price levels continue to support reasonable profitability, Best wrote.

Personal Lines Outlook

A.M. Best also continues to maintain a stable outlook for the personal lines segment in 2009 based on favorable risk-adjusted capitalization, generally favorable normalized underwriting performance and anticipation of on-going underwriting discipline.

The stable outlook reflects Best’s view that rating actions are not expected to move profoundly in one direction for personal lines insurers, with the number of upgrades/positive outlooks and downgrades/negative outlooks to be fairly balanced over the next year for those writing predominantly personal lines business.

Although there was significant volatility in 2008 due to unprecedented catastrophic activity, uncertain investment markets and difficult overall economic conditions, the personal lines segment maintains generally favorable risk-adjusted capitalization, Best reported. “This capital position reflects several consecutive years of surplus growth prior to 2008, which effectively cushioned the downward pressures experienced throughout the year.”

While overall risk-adjusted capitalization remains favorable for personal lines insurers, the decline in capitalization in 2008 does mean that there is less room for further deterioration than in prior years, analysts said in the outlook. However, analysts also anticipate that given the recent economic and investment market trends, those carriers writing predominantly personal lines coverages will approach this environment in a prudent manner, particularly from a pricing and risk-management perspective.

Despite this expectation, there are risks that lie ahead including further deterioration in the economic climate, continued high levels of catastrophic activity and the ever-present regulatory uncertainty in key markets, Best wrote. The stable outlook for the personal lines segment represents Best’s view that most carriers will be able to effectively manage through these issues given their favorable risk-adjusted capitalization and indications of the soft-market conditions subsiding. While analysts do not anticipate that currently evident trends will change materially or deteriorate at an accelerated pace, should they undergo fundamental changes, the potential exists for a revision in the personal lines outlook over the intermediate-term.

Source: A.M. Best Co.,