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NEW YORK--Standard & Poor's Corp. is maintaining its stable outlook on the U.S. commercial lines sector, but price declines across most lines could steadily erode profit margins next year, said the rating agency in a special report.
The impact of that erosion, though, will not be fully reflected in earnings until 2008, S&P said in the report "U.S. Commercial Lines 2007 Outlook: Insurers Heading for a Soft Landing."
"Overall, we believe the most serious threat to the commercial lines sector is the potential for a return to more competitive pricing," the report states. "The shocking storm losses in 2005 temporarily slowed the price deterioration then under way in both property and casualty lines. Since then, casualty rates have continued to decline, while commercial property rates have strengthened somewhat.
"Still, signs have emerged that property pricing might have peaked. Low catastrophe losses could encourage more aggressive pricing but should not drive ratings over the next six months," said the report.
The S&P report said other factors that could influence its ratings actions and outlook include its new model for measuring insurer capital strength; the possible emergence of unanticipated reserve deficiencies; and whether the Terrorism Risk Insurance Act is renewed prior to its year-end 2007 expiration date, or whether a long-term solution is found.
"However, if the industry were to maintain pricing discipline over the next two to three years and an appropriate backstop for terrorism risk (were to) be in place, the sector outlook would likely be revised to positive," the report says.
The report is available to RatingsDirect subscribers at www.ratingsdirect.com. Nonsubscribers may purchase a copy of the report for $400 by calling 212-438-9823 or by sending an e-mail to email@example.com.