S&P: Decreasing Underwriting Margins Could Hurt U.S. Commercial Lines Insurer Ratings, Outlook Says

The past few years have been good ones for most U.S. commercial lines insurers, according to an article published today by Standard & Poor's Ratings Services. The article, which is titled "Midyear 2008 U.S. Commercial Lines Outlook: Declining Underwriting Margins Could Mean Future Downgrades," says that the robust price increases that began in earnest in 2001 returned the industry to underwriting profitability in 2004, and over the past two years, the sector has enjoyed record levels of underwriting profits. But now, prices are deteriorating across virtually all commercial property/casualty lines, and there are strong indications that underwriting profitability will start declining as a result.

Published on May 30, 2008

Had it not been for Katrina-related losses in 2005, 2007 would have been the fourth year in a row that the industry generated an underwriting profit. Deterioration in underwriting profitability in 2007 was less than we had anticipated. We expect that margin deterioration will be more pronounced in 2008, but we still believe the industry will generate another underwriting profit (assuming a normal level of catastrophe losses).

"Our outlook for the U.S. commercial lines insurance sector remains stable," noted Standard & Poor's credit analyst John Iten. This means that for the rest of 2008, we continue to expect that rating actions will be fairly evenly split between upgrades and downgrades and that the total number of rating changes will be quite low. Through the first four months of this year, we took only two rating actions on U.S. commercial lines insurers, one upgrade and one downgrade. The commercial lines sector outlook has been stable since June 2005.

However, Mr. Iten cautioned that, "Our overriding ratings concern continues to be the deterioration in pricing that is occurring across virtually all commercial property/casualty lines. There are strong indications that the deterioration in premium rates that began in earnest in late 2006 has reached the point where there will be a meaningful decline in underwriting profitability for commercial lines writers in late 2008 and, particularly, 2009." If price declines continue at their current pace, we will likely revise the outlooks on some commercial lines insurers to negative in the second half of 2008, which could lead to a negative outlook for the overall sector before the end of the year. A negative sector outlook signals that we expect downgrades to exceed upgrades in the following 12 months.

This commentary and related issues will be covered at Standard & Poor's 24th annual insurance conference, "Insurance 2008: Operating Within A Global Economy," June 2-3, 2008, at the Hilton New York, 1355 Avenue of the Americas , New York , NY.