Moodys Says Personal Lines Cos. Outlook Stable

Moody's Investors Service believes that the outlook for personal lines insurance companies remains stable, the agency said in its annual report released Wednesday.

This outlook, according to Moody's, stems from the industry's strong risk-adjusted capitalization, increased surplus levels and reserves, and in spite of increased catastrophe losses.

"Through the first six months of 2005, personal lines insurers have reported strong results, reflecting continued favorable frequency trends, still-adequate pricing, and favorable reserve development on prior years' losses," said the report's author, analyst James Eck.

The impact of Hurricane Katrina has not likely been fully felt, however, and Mr. Eck noted that "insured losses arising from Hurricane Katrina may ultimately eclipse the inflation-adjusted losses of Hurricane Andrew in 1992, materially impacting overall personal lines' profitability in 2005."

Although the costs inflicted by Hurricane Katrina are expected to be high, and possibly the highest ever for an event in the U.S., Moody's said in a separate report that the agency does not expect widespread downgrades of insurance companies.

Noting that "premium rate increases have been moderating for some time and, in many states, rates have declined," Mr. Eck said it was Moody's opinion that further moderating of the market could be hastened by the actions of just a few of the larger insurance companies. These potential softening trends, however, could also be reversed, particularly in the areas hit by Katrina and those that suffered catastrophic losses in 2004.

In addition, Mr. Eck said the insurance industry could become a victim of its own success, as regulators begin to take note of the profit levels companies are experiencing.

"Over the medium term," Mr. Eck said, "additional pressure on pricing could come through regulatory intervention because the robust levels of profitability that were generated by the industry could attract more scrutiny by insurance regulators."

However, Moody's is maintaining its stable outlook because it expects the pricing cycle to be moderated by advances in underwriting and technology in recent years. Also, companies with better-developed data and management skills will be better able to react swiftly to changes in pricing and losses.

In competing with one another, Moody's noted in the report that franchise value continues to play an important role for personal lines companies. The largest companies are continuing to increase their market share, Mr. Eck noted, and brand recognition remains vitally important.

"The trend toward greater market share by the top players is not surprising," Mr. Eck said, "because these companies have the most recognized brand names, the largest advertising budgets, and the financial resources to make strategic acquisitions and structural expense ratio advantages because of their greater scale."