NU Online News Service

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The personal lines insurance industry is in good financial shape despite the economic challenges companieshave faced recently, but some consolidation is expected in thefuture among the smaller players, according to a report fromMoody's.

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The report, "U.S. P&C Personal Lines Insurance--IndustryScorecard," released by Moody's InvestorsService, said the personal lines sector for auto and homeownersinsurance remains "financially sound," despite the weak economy and"prolonged"soft market cycle.

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Despite marginal to negative premium growth for these insurersduring 2008 and 2009, primarily due to the economic crisis, "theindustry maintained profitability" with a combined ratio of 96.7 in2009. The results were helped by a benign hurricane season, thereport noted.

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"Competition remains high but rational, and earnings prospectsare good," with signs of increase in pricing in the mid- tolow-single digits during the early part of this year, the reportsaid.

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The industry was also helped by a combination of "strong cashflow generation," a moderate amount of debt, good capitalizationand conservative investing.

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On the negative side, personal lines insurance is acommodity-type product. As a mature industry, under intensecompetition, the only room for growth is through price.

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The industry is concentrated among a handful of "large,established and well-entrenched players," the report noted. Five ofthe top companies represent 50 percent of the market collectively,while the top-10 companies make up two-thirds of the market basedon 2009 direct written premiums.

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"We would expect to see consolidation among the smaller personallines players as investments in technology, advertising and brandmake it more difficult to compete, though we do not expect majorshifts in market share," Moody's said. The merger and acquisitionactivity is primarily expected to take place among smaller,regional players, Moody's suggested, but such activity is notexpected to cause "material shifts in market share over the mediumterm."

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Ratings are expected to remain unchanged for this segment overthe next 12-18 months, the rating service said, as "modest organicpremium growth, rising prices and a manageable combined ratiocontribute to a stable financial profile."

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The report noted that direct writers have an economic advantagebecause their lower overhead costs can be passed onto consumers,undercutting agency business. However, independent agents have anadvantage emphasizing service and customer loyalty.

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The report said that carriers have developed multiple channelplatforms--direct, agent and Internet--"to take advantage ofchanging consumer buying habits."

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