Key Personal Lines Strengths To Offset Impact Of Economy Some

Although U.S. personal lines insurers face a number of challenges in the struggling economy, key strengths in the industry could offset some of the pain, according to a new report released by Moody's.

In a report titled, U.S. Property and Casualty Personal Lines Insurance Industry Outlook, Moody's said the outlook for the personal lines industry is "stable," citing, among other trends, a competitive but relatively solid underwriting environment, manageable loss trends, and generally good balance sheet strength despite the volatility in the capital markets.

Moody's said the personal lines industry is "somewhat insulated" from the impact of the weakening economy because "coverages are typically mandatory and customers generally continue to pay premiums on their automobile or homeowners insurance even during periods of financial stress."

For claims, Moody's noted that weak economic conditions generally coincide with fewer miles driven for automobile owners because both increased unemployment and reduced consumer discretionary spending impact traffic volume trends. "The result is likely to keep accident frequency at lower levels, which will positively impact future insurance company earnings," Moody's said.

The trend towards smaller cars, driven partly by the previous spike in gas prices, could both positively and negatively impact insurers, Moody's said.

Crashes involving small vehicles generally result in higher bodily injury claims, and potentially higher physical damage claims, the firm noted. But replacement costs, and also property damage to other vehicles or objects, are expected to be lower.

Negatively affecting insurers, Moody's said consumers tend to file more claims during periods of economic downturns.

Additionally, Moody's said customers tend to actively shop for insurance in a weak economy, which could affect policy retention.

Consumer and political pressure could also mean that regulators will be less likely to grant rate increases or may slow the process of approving filings, Moody's said.

Speaking to investments, Moody's noted that "the majority of the investment portfolio for companies is generally held in high quality, fixed income securities with relatively short duration." This, Moody's said, will help support personal lines insurers' credit profiles during "a highly challenging period of investment volatility."

However, Moody's added that personal lines carriers, particularly large mutual companies, tend to hold, on average, "a significant portion of their investment portfolios in common stocks. Because of this exposure, the recent plunge in equity markets has quickly translated into balance sheet deterioration."

Competition is expected to remain high for the foreseeable future, Moody's said, because of the industry's "maturity, its large number of competitors and its relatively strong capitalization."

But Moody's said the competition, while strong, will remain rational. "Pricing is generally expected to be stable or moderately increasing. Competitive actively is likely to focus on areas such as advertising, marketing, distribution, expense control and product offerings."

Moody's also said with limited organic growth opportunities for insurers, mergers and acquisitions activity will likely pick up. "Such activity can have negative credit implications for the acquiring company due to execution and integration risk, and the general uncertainty regarding the quality of the acquisition target...," Moody's said.