US commercial property and casualty insurers are facing continued weak pricing that will impact profits, Standard & Poor’s (S&P) warns in a new report on the US insurance industry.

“Although rates have started to stabilise and slightly pick up on certain lines of business, this is only happening after four years of pricing declines,” the report says.

“We continue to believe that underwriting margins will be compressed as loss trends rise more than premium rates.”

S&P says the commercial lines market is still competitive, but increased underwriting capacity is holding down rates.

“In our opinion, the combination of low rates and reduced investment income will squeeze profit margins for many commercial insurers in 2011 and perhaps in 2012,” it said.

Poor returns on investments will also cause headaches for US life insurers, the ratings agency warns.

It sees the low returns from treasury and corporate debt notes as “significantly reducing the value” of an insurer’s investments.

“Widening spreads mean that if an insurer had to liquidate assets to meet its obligations it might do so at the risk of realised losses.

“We think that this risk is greatest for life insurers that offer accumulation products such as fixed-rate annuities and universal life insurance.

“Many of these products offer guaranteed minimum interest rates that may not be achievable in a low rate environment.”

S&P says those life insurers that can match liabilities to assets and exercise prudent risk management when making investments will stand the best chance of survival in a low-interest rate environment.

It  says the outlook for personal lines, global reinsurance, life and health insurers remain stable with only commercial recording a negative outlook.

S&P says it has only issued a limited number of negative ratings against insurers this year and it expects a similar situation during the next 12 months.