While Buyers Enjoy Falling Premiums, S&P Sees 'Negative P-C Outlook

The Market Barometer survey indicated that while commercial insurance prices are still falling, the rate of decline is moderating–with last month's average cut of 11 percent three points lower than the 14 percent drop in July 2007.

In June, MarketScout reported the same reductions–an average decline of 11 percent for June 2008, compared to the 14 percent drop reported in June 2007–calling the June figure the "largest year-on-year moderation in the last three years."

However, such "moderation" did not impress analysts at S&P.

"Although some companies and outside observers have suggested that the rate of deterioration might have bottomed out in the second quarter, rates are still declining steadily," Mr. Iten said. "Absent an extraordinary event, we do not see anything reversing the general downward direction of rates over the next six to 12 months."

The last time S&P revised its outlook for the sector was in June 2005, when the agency raised its assessment to stable from negative, "as our concerns abated over the impact of regulatory investigations into anti-competitive industry practices," following probes into contingency fee abuse and price-fixing by then New York Attorney General Eliot Spitzer and others.

Three years later, S&P chose to reverse that move, because over the next 12-to-18 months, rate declines "will adversely affect underwriting results."

On a positive note, S&P said it expects full-year 2008 underwriting results for "most" commercial lines writers to "remain relatively strong," while the U.S. property-casualty industry's combined ratio stays below the magic 100 profitability mark.

"However, we believe underwriting performance will deteriorate through the remainder of 2008 and through much of 2009," S&P added.

The rating agency noted other factors contributing to its outlook revision, including "the worse-than-anticipated deterioration in net investment income through the first half of 2008 and the significant increase in net unrealized investment losses, reflecting continued developments in credit markets."

S&P said that "for the most part, property-casualty companies maintain asset portfolios with less volatility than those of many other types of financial institutions."

However, the agency added, "as we have seen over the past year, market disruptions can have significant effects on the performance of individual companies–especially those with long-tail liabilities."

Despite S&P's overall downgrade in its assessment of the p-c sector's outlook, thus far this year "the number of upgrades in the U.S. commercial lines sector actually exceeded the number of downgrades by a margin of four to two."

However, Mr. Iten added, "at this point, we see few–if any–of our rated insurers as likely upgrade candidates over the next 12 months. Meanwhile, as underwriting results continue to deteriorate, we expect the number of commercial lines companies with negative outlooks to increase by year-end 2008, and downgrades to exceed upgrades in 2009."

S&P warned that "the decline in operating performance could worsen if there is no recovery in the credit markets and unrealized capital losses lead to higher impairment charges on insurers' fixed-income portfolios."

SURVEY RESULTS

According to the July Market Barometer survey, premium rates charged for commercial property insurance are falling faster than the overall average of 11 percent–down 14 percent in July.

Joining commercial property in the double-digit decline category in July were general liability (11 percent), umbrella/excess liability (11 percent), employment practices liability (11 percent), and crime insurance coverage (10 percent), MarketScout reported.

Directors and officers liability, fiduciary liability and workers' compensation rates only declined an average of 7 percent last month. Business interruption, commercial auto and professional liability rates fell 9 percent, while inland marine prices were down 8 percent.

By class, manufacturing firms enjoyed the biggest average rate cut at 13 percent, while energy and transportation buyers saw prices fall 9 percent.

"The subprime crisis continues to create concerns despite massive equity write-downs by major insurers," said Richard Kerr, chair and chief executive officer at MarketScout, a Dallas-based electronic insurance exchange working off www.marketscout.com.

"While these losses are not directly related to insurance underwriting results, they ultimately will impact insurers' appetite to continue rate cuts," he added.

Meanwhile, the RIMS Benchmark Survey also found commercial insurance "still very much a buyer's market–and [it] should remain so, at least through 2008," according to New York-based Advisen, which produces the survey for RIMS.

The 6.1 percent decrease in premiums for property insurance in the second quarter essentially repeated first-quarter price decreases for renewals, even though forecasters now predict a severe hurricane, Advisen noted.

Differences in the numbers between the RIMS and MarketScout surveys could reflect the size of buyer involved–with the RIMS report querying larger risk managers.

In general, "insurers' net profit plunged in the first quarter, due largely to falling rate levels," said David Bradford, editor-in-chief of Advisen. "But the property-casualty industry is still overcapitalized, which continues to put downward pressure on premiums."

The RIMS survey reported a decrease in average general liability rates of nearly 5 percent, compared to 2 percent in the first quarter. But after an unexpected 11 percent drop in the first quarter, average workers' comp rates fell just 1.7 percent in the second quarter, Mr. Bradford noted–adding this was not evidence of a trend, but that rates just fluctuate from quarter to quarter.

Even the average D&O liability insurance premium fell a comparatively moderate 6.4 percent in the second quarter, after dropping sharply in the first quarter, according to the RIMS study. Rates are still falling despite losses from the subprime debacle, which are expected to cost D&O insurers an estimated $3.6 billion in claims over three years, Mr. Bradford observed.

He said that only financial and real estate firms with subprime exposure have experienced D&O price increases–and even these on a risk-by-risk basis.

D&O coverage costs have been falling "vigorously since the beginning of 2004," due to the huge money flow into the market because of its relatively low risk, he added.

Moreover, he said, despite anticipated subprime-related losses, the industry will break even because the cost will be spread between 2007 and into 2009.

The reason prices are falling, according to Mr. Bradford, is because the industry has not suffered major D&O losses since the Enron and Worldcom problems of the early 2000s.

With Market Barometer