U.S. commercial lines sector “stable,” despite decreasing rates

Standard & Poor’s Ratings Services is maintaining its stable outlook on the U.S. commercial lines sector, saying the effects of softening pricing won’t be felt on insurers’ balance sheets until about 2008.
A “stable” outlook means S&P’s expects the number of upgrades and downgrades over the next six to 12 months to be fairly balanced, with neither one outpacing the other.
“As 2006 draws to a close, many commercial property/casualty insurers are generating exceptional earnings,” the ratings agency notes in a recent report posted on its Web site. “Many balance sheets are in their best shape since the late 1990s, when the industry entered its last cyclical pricing downturn.
“Still, moderate but steady pricing declines across most lines in 2006, a trend expected to continue in 2007, could slowly but steadily erode profit margins next year. The impact of that erosion, however, won’t be fully reflected in sector earnings until 2008.”
Overall, S&P’s said it believed the most serious threat to the commercial lines sector is the potential for a return to more competitive pricing. “The shocking storm losses in 2005 temporarily slowed the price deterioration then underway in both property and casualty lines,” S&P’s says. “Since then, casualty rates have continued to decline, while commercial property rates have strengthened somewhat.”
S&P’s went on to say signs have emerged that property pricing “might have peaked.” Low catastrophe losses could encourage more aggressive pricing but should not drive ratings over the next six months, said the ratings agency.