WASHINGTON–Increasing rate deterioration across virtually all commercial business lines means "there are speed bumps ahead" for the sector, Standard & Poor's is forecasting. However, the rating service reported commercial carriers will remain profitable in 2008.
S&P noted that while 2007 is turning out to be a strong year for profits, prices deteriorated as the year wore on.
As a result, S&P said, its outlook is for 2008 to be "stable" for commercial insurers.
"This means we expect the number of upgrades and downgrades over the next six-to-12 months to be fairly balanced," S&P said. "We also expect that the total number of rating actions will be low," the outlook report added, noting that recent rating trends in the commercial lines sector further support a stable sector outlook."
Net premiums written fell by $600 million in the second quarter, the report said. And S&P, for the full year, said it expects net premiums written to decline a modest 1 percent to 2 percent–a trend it said should continue in 2008.
"With top-line growth now negative and loss costs and underwriting expenses expected to continue growing, underwriting results will decline," S&P projected. Excluding any change in catastrophe losses, "we expect the combined ratio to increase three-to-four percentage points to 96 percent to 98 percent."
S&P said increases in the combined ratio will be partially offset by increased net investment income.
"We expect positive underwriting cash flows to boost invested assets, but a modest decline in portfolio yield will partly offset growth in fixed-income portfolios," the report said.
S&P's comment about "speed bumps" that could lower profits is based on its "increasing" concern that the softening market is driving the commercial lines sector to become more price-competitive. However, the rating service said it is unable to quantify the potential decline.
"Although all parties agree that rates are declining, there is no agreement on the magnitude of the fall," it said. "Surveys of insurance intermediaries (brokers and agents) show the largest rate declines, pegging the current average rate decline at about 13 percent year-over-year," S&P said.
At the same time, it said, "surveys of risk managers and insurance companies, along with price change data disclosed by some large insurance companies, suggest a much more modest rate of deterioration in the mid-single-digit range," S&P said.
Regarding 2007, it said one reason for the strong year was the "exceptionally low" level of hurricane activity, and the decline in adverse prior-year reserve development. But, S&P concluded, the "margin compression on business written in 2007 will become more evident in 2008."
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