Many would agree that the U.S. P&C personal lines insurance industry continues to face constant challenges. However, Moody's Investors Service’s Industry Scorecard report indicates the industry is doing a good job of fending them off.
According to the company’s "US P&C Personal Lines Insurance – Industry Scorecard," the industry remains financially sound despite the weak economy and prolonged soft, though improving, pricing environment.
The Industry Scorecard looks at the portfolios of 12 personal lines insurance companies whose personal lines premiums represent at least two-thirds of net premiums written.
"While some companies reported marginal or even negative premium growth for the past two years due to the economic downturn and cyclical decline in pricing, the sector maintained profitability, with a combined ratio of 96.7% in 2009," says analyst Enrico Leo, adding that the insurers' fundamentals were helped by last year's benign hurricane season.
Spending on advertising and marketing more than doubled since 2003, driving competition higher. However, earnings prospects are good, with companies raising homeowners' rates in response to historically high non-catastrophe weather losses in 2009 and the first half of 2010. Moderate financial leverage, good capitalization and conservative investment strategies are also key advantages for the sector, Moody’s says.
Challenges for personal lines insurers still remain—weak auto sales and housing market trends, rising claims severity trends and significant property catastrophe risk. The highly competitive market in terms of pricing and high barriers to entry also challenges personal lines insurers, while their consumer-orientated products attract considerable regulatory scrutiny, and the potential for lawsuits is inherent in their business.
Moody’s also notes that consolidation among the smaller insurers is expected as larger companies increase their investments in technology, advertising and branding, though major shifts in market share are not expected. The agency also expects that key rating factors for personal lines insurers will likely remain unchanged over the next 12 to 18 months as modest organic premium growth, rising prices and a manageable combined ratio contribute to a stable financial profile.
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