U.S. Commercial Lines Outlook Revised To Negative From Stable

Standard & Poor’s Ratings Services revised its outlook on the U.S. commercial lines property/casualty insurance sector to negative from stable.

Standard & Poor’s credit analyst John Iten explained that the decision to revise the sector outlook reflects S&P’s “concern over two issues, the ongoing decline in pricing for commercial lines and decreases in investment income.”

Price competition persists across virtually all commercial lines, with prices continuing to decline, albeit at a somewhat moderated pace in the second quarter, the rating agency said. Based on industry pricing surveys and information that companies provided in their second-quarter earnings releases, S&P believes pricing in the second quarter for renewal business declined at a mid-single-digit rate in most lines and at a low-double-digit rate for new business.

“Although some companies and outside observers have suggested that the rate of deterioration might have bottomed out in the second quarter, rates are still declining steadily,” Iten said.

“Absent an extraordinary event, we do not see anything reversing the general downward direction of rates over the next six to 12 months.”

Over the next 12 to 18 months, this decline in rates will adversely affect underwriting results, according to S&P. The rating agency expects that full-year 2008 underwriting results for most commercial lines writers will remain relatively strong, with the U.S. P/C industry’s combined ratio still less than 100 percent.

However, S&P believes underwriting performance will deteriorate through the remainder of 2008 and through much of 2009.

Other factors contributing to the outlook revision are the worse-than-anticipated deterioration in net investment income through the first half of 2008 and the significant increase in net unrealized investment losses, reflecting continued developments in credit markets.

“Market disruptions can have significant effects on the performance of individual companies, especially those with long-tail liabilities,” he said.

In 2008 through mid-August, the number of upgrades in the U.S. commercial lines sector actually exceeded the number of downgrades by a margin of four to two.

“However, at this point, we see few — if any — of our rated insurers as likely upgrade candidates over the next 12 months,” Iten said. “Meanwhile, as underwriting results continue to deteriorate, we expect the number of commercial lines companies with negative outlooks to increase by year-end 2008 and downgrades to exceed upgrades in 2009.”

The decline in operating performance could worsen if there is no recovery in the credit markets and unrealized capital losses lead to higher impairment charges on insurers’ fixed-income portfolios, he added.