Personal lines insurers' recent hefty profit trend will falter in 2008 as prices continue to soften, Standard & Poor's Rating Services predicts.
The firm, n its U.S. personal lines outlook report, aid it does not believe "the sizable profit margins of the recent past will continue because of intense rate competition, especially in the auto market…"
S&P said competition and less available new business growth will also reduce profits, s carriers may be tempted to discount product offerings and loosen terms and conditions to maintain their competitive positions and market shares, as they did during the last soft market from 1987-2001.
For the current year, the rating firm said it foresees personal lines will show "strong, resilient profitability, and a combined ratio of about 94-to-96 in spite of increased competition.
S&P attributed the positive results to prudent risk management, enhanced enterprise risk management practices, and greater pricing and underwriting discipline–stemming from better technology and use of data to understand and mitigate exposure.
Capitalization is strong, S&P said, because of several hard market years coupled with low catastrophic activity for the past two years.
"Solid investment and liquidity positions stemming from robust balance sheets and conservative financial management practices have also boosted capital," the report noted.
The firm noted that price cuts for auto coverage were more frequent in the past year, partly because of declines in accident frequency and smaller accident severity trends.
In 2008, the analysis, by Neil Stein predicts "net written premiums experiencing low single-digit growth, at best."
The report finds the personal lines sector overall to be sufficiently capitalized, with companies' investment portfolios in "excellent shape," and S&P said it expects "sector liquidity to remain strong for the foreseeable future."
Examining the auto line, the report said larger carriers are far better positioned competitively than smaller regional ones.
It noted that the top-15 auto carriers own about 75 percent of the market, and says their scale and geographic diversification enable them to price, underwrite and manage reserves more effectively than small carriers.
S&P said larger auto carriers' investments in technology over the past several years are also enabling much faster ERM implementation.
Although companies will be challenged to maintain top-line growth in the coming year, S&P said it expects short-term profitability to remain healthy through the end of 2007 and into 2008
For the homeowners line, the report said if catastrophe trends remain close to historical norms in 2008, operating performance for homeowners carriers will most likely be solid.
However, S&P said it believes the U.S. housing market's slump, which began early in the summer and shows no signs of abating, could weaken results.
New residential construction and home ownership had facilitated steady new premium growth. Slowed construction activity and falling home prices could hurt bottom- and top-line growth and reduce the segment's earnings at least through 2008.
The report also examined markets, impacts of legislation and other factors in Florida, Louisiana, Massachusetts, Mississippi and New York.
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