"While some companies reported marginal or even negative premium growth for the past two years due to the economic downturn and cyclical decline in pricing, the sector maintained profitability, with a combined ratio of 96.7% in 2009," says Analyst Enrico Leo, adding that the insurers' fundamentals were helped by last year's benign hurricane season.
Competition remains high, with spending on advertising and marketing more than doubling since 2003. Nevertheless, earnings prospects are good, with companies raising homeowners' rates in response to historically high non-catastrophe weather losses in 2009 and the first half of 2010. Moderate financial leverage, good capitalization, and conservative investment strategies are also key advantages for the sector.
Among the challenges for personal lines insurers are weak auto sales and housing market trends, rising claims severity trends, and significant property catastrophe risk. "Although insurers have reduced their exposure to the Florida market, demographic shifts to coastal regions and increased development directly on the coastline are among the factors contributing to a long-term increase in insurers' exposure to catastrophes, " Leo notes.
Personal lines insurers are also challenged by the highly competitive market in terms of pricing and high barriers to entry, while their consumer-orientated products attract considerable regulatory scrutiny, and the potential for lawsuits is inherent in their business.
Consolidation among the smaller insurers is expected as larger companies increase their investments in technology, advertising, and branding, though major shifts in market share are not expected. We also expect that key rating factors for personal lines insurers will likely remain unchanged over the next 12 to 18 months as modest organic premium growth, rising prices, and a manageable combined ratio contribute to a stable financial profile.
The Industry Scorecard looks at the portfolios of twelve personal lines insurance companies whose personal lines premiums represent at least two-thirds of net premiums written. It provides analysis and metrics in seven main areas: market position, brand, and distribution; product focus and diversification; asset quality; capital adequacy; profitability; reserve adequacy; and financial flexibility.