Moody’s continues negative outlook on commercial insurance market

This article was published in Business Insurance magazine on January 12, 2011:

Moody’s continues negative outlook on commercial insurance market

By Michael Bradford 

Weak pricing and limited demand has led Moody’s Investors Service to continue a negative outlook for the commercial lines insurance sector in the United States.

New York-based Moody’s said in a report Wednesday that U.S. insurers also are pressured by low interest rates that dampen investment returns.

“Although P&C insurers broadly avoided the worst strains of the recent financial crisis and contagion, the fundamental forces at work that we identified in our previous outlook have continued to pressure commercial insurers’ profitability and internal capital generation,” Moody’s said in the report.

Despite its negative outlook, originally issued in March 2009, Moody’s said the sector still enjoys a strong credit profile, and broad negative rating actions are not expected in the near term.

The report comes after a similar action this week by A.M. Best Co. Inc. in which the rating service revised its 2011 outlook on the commercial insurance industry from stable to negative. Best cited soft pricing, competition and a smaller loss-reserve cushion available to insurers as reasons for its negative outlook.

Moody’s pointed out that insurers are affected by the overall financial downturn in the United States.

“Commercial insurance is essentially a proxy for the underlying business economy, and reductions in employment levels, commerce, transport, construction and manufacturing not only translate into reduced premium volume given fewer insureds in the market, but also exert downward pressure on rates, as carriers reduce prices to maintain share in a shrinking market,” said Alan Murray, vp and senior credit officer at Moody’s, and author of the report, in a statement.

Commercial insurance pricing is not expected to firm soon, the report suggested.

“Absent a near-term emergence of industrywide negative operating cash flow (underwriting cash flows are already negative) or the occurrence of a significant liability or property-based catastrophe, we do not see a return to strengthened pricing conditions to alleviate the current pressures,” the report said. “In fact, should reserve margins indeed be exhausted by year-end 2010 or in 2011, earnings strength for the sector could come to an abrupt halt.”

Capital adequacy remains relatively strong for most commercial insurers, according to Moody’s but has been declining on a risk-adjusted basis.

Insurers are more actively managing their capital through share buybacks and acquisitions, Moody’s said. While such actions so far have been viewed as ratings-neutral, they will need to be cautiously managed “in the context of ongoing negative operating trends,” Moody’s said.

In a separate report, Moody’s said it expects most standard commercial insurers to report break-even, or slightly deficient, reserve positions for year-end 2010. That will translate to reduced earnings strength going forward, “as reserve releases have bolstered reported earnings in recent years,” Moody’s said.