A.M. Best Reports a Stable U.S. Commercial Lines Sector

February 23, 2010

Despite soft market conditions, the anticipation of less favorable loss reserve releases and a contracting economy, the U.S. commercial lines insurance market remains relatively stable.

According to A.M. Best, while the pricing behavior of commercial lines insurers is always difficult to predict, most key indicators would suggest a flattening in commercial lines rates in the later part of 2010. “This shift in pricing will be prompted by intensified margin compression and the need to compensate for lower investment yields, a weaker overall economy and less robust reserve releases,” the rating agency said. A.M. Best also believes loss cost inflation, combined with today’s modest risk-free rate of return, should further fuel up-pricing.

“For the vast majority of commercial lines insurers, investment impairments and mark to market adjustments through 2009 have been manageable, as balance sheets remain relatively intact with capital levels that remain appropriate for their ratings,” the rating agency said. “On the other hand, earnings prospects for commercial lines insurers will likely be dimmed by slower economic growth, fewer new business opportunities, weaker investment earnings and moderating cash flows due to the decline in new money yields.”

The rating agency said it believes that commercial lines insurers are now at a crossroad.

“Depending on which direction this segment moves will set the tone for this segment for years to come. If competition intensifies in 2010, there’s little doubt that this segment will suffer the consequences. Thus far, key indicators and behavior among most insurers does not suggest that this is the case.”

In the coming 12 months, A.M. Best expects some continued moderation in underwriting and operating profitability. Profit margins for commercial lines should remain relatively solid but likely lower than in previous years. “In past years, a major contributor to this segment’s profitability has been favorable prior-year loss-reserve development. However, given the extent of loss-reserve releases over the past few years and higher initial loss ratio selections, these benefits will diminish in 2010 and beyond,” the rating agency said.

The number of upgrades/positive outlooks and downgrades/negative outlooks should be fairly balanced over the next six to 18 months, A.M. Best said. During this period, the rating agency also believes the overall commercial lines segment will continue to maintain adequate balance sheet strength, profitability and liquidity — a positive for a stable commercial lines segment.

Source: A.M. Best Company, www.ambest.com

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