US personal lines outlook stable, commercial lines outlook negative: A.M. Best

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US personal lines outlook stable, commercial lines outlook negative: A.M. Best

Global reinsurance remains stable as industry weathers cats, pricing begins to turn.

January 9, 2012

Divergent trends are influencing rating outlooks for the various segments of the P&C industry in the US, with personal lines continuing to benefit from solid performance in auto insurance, and commercial lines carrying on the struggle to turn pricing decisively upward. Balance sheets remain strong but susceptible to threats in both segments.

Personal Lines: Stable

A.M. Best continues to maintain a stable outlook in 2012 for the personal lines segment. The stable outlook implies that the majority of 2012 rating actions for this segment are likely to be affirmations, with a fairly balanced distribution of negative and positive rating actions.

Similar to the past several years, results in the personal lines segment reflect two divergent trends among the segment’s main lines of business: automobile and homeowners. On one hand, the auto line continues to perform well, with generally adequate and stable returns. This is in contrast to the extreme volatility associated with the property lines of business due to the effects of continued weather-related losses.

Given that the auto line represents more than 60% of the segment’s net written premium, the outlook remains stable.

Commercial Lines: Negative

Despite a mending economy and some encouraging signs of price firming, A.M. Best maintains its negative outlook for the commercial lines segment for 2012. This outlook implies that while the vast majority of rating actions will be affirmations, negative rating actions will outnumber positive rating actions during the year.

Although growing numbers of leading commercial lines insurers express publicly the need for rates to increase, premium growth in the segment is on the upswing for the first time in five years. While these recent pricing trends are both encouraging and note-worthy, A.M. Best remains skeptical that a long-term reversal in market pricing has arrived and believes insurance cycles are measured in years, not in quarters. That being said, any benefit will be incremental.

Given the fragility of the US economy, the willingness and resolve of insurers to sustain further positive rate momentum in the small to midsize accounts will be tested by the purchasing power of Main Street American businesses – many of which are already strained by sluggish economic growth. As for large accounts, any increase in pricing will face pressure from insurance brokers and risk managers. Despite these head- winds, further pricing momentum through 2012 is expected for certain lines of business such as commercial property and workers’ compensation.

Balance sheets of commercial lines insurers, while relatively strong, are expected to show continued erosion in loss-reserve adequacy.

While the commercial lines outlook remains negative, A.M. Best does not expect rating actions to move profoundly negative, as abundant capital and investment income continue to generate operating cash flows, positive earnings and continued growth in surplus. For some, however, marginal capital and low interest rates have forced greater emphasis on underwriting profitability to avoid negative rating actions.

Global Reinsurance Market: Stable

Despite numerous challenges, A.M. Best’s rating outlook on the global reinsurance segment is being held at stable, supported by continued strong risk-adjusted capitalization, prudent ERM practices and an improving pricing environment across a broadening spectrum of business classes.

From a capital perspective, global reinsurers are well capitalized and capable of absorbing significant losses from a combination of events. While the ongoing financial crisis in the eurozone presents an unprecedented amount of uncertainty and challenges, over the past year most global reinsurers have taken decisive measures to reduce or contain their direct exposure to the ongoing sovereign debt crisis. A.M. Best and indeed reinsurance companies themselves have performed various capital stress scenarios to be assured that risks associated with underwriting and investment activities are manageable from a capital perspective.

While shorter tail classes of business generally have remained more attractive from a pricing perspective, it now appears casualty pricing may be reaching a trough as well, as reserve margins come under pressure and interest rates remain stubbornly low. A.M. Best believes these dynamics, coupled with capital management strategies, will lead to improved pricing, terms and conditions that will support a low double-digit return on equity in 2012 and continue to support reasonable organic growth in capital, assuming a normal level of global catastrophe losses.