A.M. Best assigns negative outlook to U.S. P/C market

A.M. Best has extended its negative outlook for the 2006 U.S. commercial insurance market. “A.M. Best anticipates there will be few rating upgrades or positive rating outlooks assigned in 2006 due to pricing deterioration in 2005, the expectation of continued (albeit lessened) reserve development and the dimmed long-term business prospects attributable to the emergence of a new soft cycle.” The ratings agency said its 2006 outlook did not reflect results posted in 2005, “but is more forward-looking, taking into consideration A.M. Best’s view of the sector over the next 12 to 36 months.”The agency said U.S. commercial lines insurers in 2005 continued to recognize the benefits of cumulative rate increases and actions taken in past years to strengthen both core and legacy reserves. “During this period, A.M. Best believes many U.S. commercial lines insurers were the recipients of much improved pricing, proving the old adage: ‘A rising tide lifts all boats.'”But with “the beginning of a new soft cycle now under way,” A.M. Best believes price erosion, loss cost inflation and higher reinsurance costs will lower profit margins for the U.S. commercial lines sector in the intermediate term.The agency anticipates that in the near term, net underwriting profits are likely to be reported in 2006, assuming more normalized catastrophe losses and continued (albeit moderate) funding of prior-year reserves.A.M. Best’s outlook takes into consideration the future consequences of price softening and the assumption that terms and conditions already have been compromised in certain segments of the market. “Based on these assumptions, A.M. Best is concerned with this sector’s ability to sustain any new pricing momentum over the long term. Although Hurricane Katrina may have helped stall further price-cutting in the commercial property segment, its impact on commercial casualty pricing is likely to be modest. Furthermore, the sector’s ability to preserve capital while maintaining balance sheet integrity through another prolonged soft cycle is of great concern to A.M. Best.”