S&P Outlook For P-C Industry Turns Negative

Standard & Poor's Ratings Services has revised its outlook on the U.S. commercial lines property-casualty insurance sector to negative from stable as rates are expected to continue to decrease for another year.

In a statement, S&P’s credit analyst John Iten explained that “our decision to revise the sector outlook reflects our 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, S&P said. Based on industry pricing surveys and information that companies provided in their second-quarter earnings releases, the New York-based rating firm said it 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,” Mr. 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, S&P continued. The rating service said it 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.

However, S&P cautioned that it still 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.

S&P said it last revised its outlook on the U.S. commercial lines p-c sector in June 2005. The revision then was from negative to stable.

In 2008 through mid-August, the number of upgrades in the U.S. commercial lines sector exceeded the number of downgrades by a margin of four to two, said S&P. However, Mr. Iten warned that the rating service sees few upgrades, if any, for this year and the number of commercial lines companies with negative outlooks is expected to increase by year’s end.

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, S&P said.