The personal lines insurance sector maintains a stable outlook in the face of a highly competitive environment, 2011 catastrophe losses and sluggish economic conditions, according to a report from Moody’s Investors Service.
“Going forward,” said Assistant Vice President Enrico Leo, “the credit profile of the personal lines insurance sector will be driven by stable core earnings power, rational though high competition, and continued personal insurance rate increases, offset by the threat of natural catastrophes, as evidenced by Hurricane Irene this past weekend, lower investment yields and sluggish economic conditions.”
While macroeconomic trends such as continued high unemployment and a slow housing market will dampen new business growth, personal lines insurers remain somewhat insulated from the effects of the weak economy, the report says. This is because customers generally maintain their auto and homeowners’ insurance policies given their mandatory nature.
“With the increasing rate environment in auto and homeowners’ insurance,” said Leo, “personal lines insurers are expected to continue to focus on maintaining high policy-retention levels and to report modest top-line growth for the remainder of 2011.”
Insurers have reported sizeable underwriting losses on their homeowners’ lines due to record catastrophe losses through the first half of this year. While insurers are assessing damages from Hurricane Irene, losses are expected to be manageable for personal lines insurers, though it will put additional strain on 2011 earnings, according to Moody’s.
Whether severe industry-type or more frequent weather-related events, catastrophes will continue to drive earnings volatility, making exposure management a high priority for insurers, Leo said.
The top five companies in personal lines insurance represent approximately 50 percent of the market, raising the prospect that pricing levels can be dictated by just a few companies, according to the report.
Recent high advertising spending is also expected to continue to drive strong competition over the near to medium term.
“Despite the challenges they face, personal insurers’ good capitalization, moderate liquidity concerns, and generally low underwriting leverage and high-quality investment portfolios will enable them to withstand volatility related to catastrophes and investments,” Moody’s said.
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