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The credit profile for personal lines of insurance in the United States is stable, despite intense underwriting competition and a weak economy, Moody's Investors said.
In a report, the New York-based rating agency cites the sector's core underwriting earnings power, resilience to a weak economy and good risk-adjusted capitalization as reasons for the stable outlook.
The company said it expects core underwriting earnings (excluding catastrophes and investment gains/losses) to be challenged by tough competition, but overall, it thinks that they should remain relatively stable over the next 12-to-18 months.
Moody’s noted that pricing trends appear to be on the upswing with auto rates rising modestly, on average in the low single digits, and the rating agency said it believes homeowners' rates could increase in the mid-single-digit range, following flat-to-declining pricing in recent years.
Given weaker expected investment income, higher accident-year ratios and less embedded reserve redundancies, Moody’s said it is likely that managements will continue to focus ever more closely on maintaining price adequacy and acceptable underwriting margins.
Analyst Enrico Leo, the report's author, said, “Generally speaking, the strong balance sheet positions of most personal lines insurers were bolstered during the middle of the past decade from good underwriting earnings, healthy investment returns and vibrant capital growth, which allowed this sector to hold up well during the more recent turbulent times.”
“Personal insurers' good risk-adjusted capitalization stems not only from relatively low reserve and underwriting leverage, but also from their fairly conservative investment leverage, good asset quality and moderate liquidity concerns,” said Mr. Leo in a statement.
On average, he explained, invested asset portfolios have minimal exposure to non-investment-grade bonds and problematic vintages of residential mortgage-backed securities and commercial mortgage-backed securities.
He said their investment books are mostly made up of high-quality fixed-income securities with short durations—although they also hold about 16 percent of their assets in common stocks.
During the next 12-to-18 months, Moody’s forecasts that challenges to the personal lines sector will stem from difficult economic conditions, harsh competition, a thinner cushion in loss reserves, ongoing legal and regulatory development, and potential volatility from catastrophe losses.
“Nevertheless,” Mr. Leo said, “our stable outlook on the industry reflects our view that fundamental credit conditions are sound, that competition will be intense but also rational, that rates are rising moderately, and that debt and equity funding availability is normalizing.”
The report is titled “U.S. Personal Lines Insurers: Outlook Remains Stable.”