Moody's Investors Service said yesterday it foresees a profitable year ahead for the United States personal lines insurance industry.
In a report that found the sector appears stable, Moody's noted very strong insurer balance sheets, a stable environment for investments and stable trends for losses.
"We expect core underwriting results to remain strong. Personal lines firms are set on a profitable course for 2007, though catastrophe losses remain an ever-present threat to profitability," said the report's author, vice president and senior analyst Paul Bauer.
The report described the environment for pricing as adequate, though moderating.
"While competition within the personal lines segment is expected to remain intense, competitive activity appears likely to manifest itself through advertising, marketing and commission expenditures rather than aggressive wholesale price cutting," said Mr. Bauer.
Some of the increase in competition can be traced to the success of companies that distribute product directly to consumers, he added.
The report said consumers will likely continue to embrace the direct channel for commodity-like products such as auto insurance.
Moody's said the agency-distribution model, however, remains entrenched and will continue as the leading distribution channel, given its service orientation, close ties to the customer, and the assistance it offers in underwriting.
Looking at the checks on credit quality, Moody's said the industry's exposure to catastrophe losses will continue to contribute to volatility in industry performance.
The report noted, however, that over the past year personal lines companies have focused on enhancing overall catastrophe risk management practices. Models have been recalibrated, and in many cases companies have chosen to increase prices, reduce exposure, tighten terms and conditions, and purchase additional reinsurance.
The insurers also remain exposed to investment portfolio losses and adverse regulatory or legal developments.
"The vulnerability of insurance companies to state-specific regulatory and political risk reinforces the importance of geographic and product diversity to a company's earnings stability and financial strength," noted Mr. Bauer.
At the present time, Moody's said the regulatory environment in Florida is in flux, while California has recently introduced rate reductions for both auto and homeowners totaling, the state insurance department says, well over a $1 billion a year.
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