Best Says P/C Sector Combined Ratio to Rise More Than 100

A.M. Best Co. rating service is increasing its combined ratioloss estimate for the property/casualty industry by close to fivepoints from its projection at the beginning of the year, pushingthe figure over 100.

Best reports its 2008 estimate for the overall industry risesfrom a just-profitable January projection of 98.6 to 103.2. Theforecast covers personal lines, commercial lines, and the U.S.reinsurance segment.

The increase was prompted by continued price softening,challenging market conditions, unusually high catastrophe losses inthe first half of the year, and significant underwriting lossesreported by mortgage and financial guaranty insurers, according toBest.

Penn Treaty Stops Selling New Policies

Long-term-care insurer Penn Treaty American Corp. has suspendedsales of new policies and voluntarily agreed to submit arehabilitation plan to the Pennsylvania Insurance Department onJan. 1, 2009.

If Penn Treaty cannot find a buyer or secure substantialfinancing, its auditors may declare the company is no longer agoing concern, the company explains.

Penn Treaty reports its primary insurance subsidiary will becomeinsolvent under the plan unless new financing is found to replacereinsurance agreements that recently were terminated. The companysays its subsidiaries have notified their primary reinsurer,Imagine International Reinsurance Ltd., they intend to take backall policies reinsured under several agreements Jan. 1.

The company says its surplus has been enhanced by about $145million as a result of the reinsurance agreements. In taking backthe reinsured policies, Penn Treaty's primary insurance subsidiarywould be considered insolvent under Pennsylvania statute, unlessthe company can find another strategy for maintaining an adequatesurplus by Jan. 1, the company says.

Gimmick Loans Avoided Mortgage Insurance

Private mortgage insurance (PMI) is fulfilling its role inprotecting lenders, but many loans hurting lenders today involvedtechniques that circumvented PMI requirements for home loans,insurers claim.

Rick Gillespie, senior vice president, corporate communications,of mortgage insurer Radian, says, “The mortgage insurance industryis doing exactly what it was intended to do. Not without paying.Obviously, the companies that comprise the mortgage insuranceindustry are experiencing the same housing and credit challenges aseveryone. But the claims have been paid. Each company is dealingwith it a little bit differently from a capitalization andliquidity standpoint.”

Gillespie notes the government-sponsored enterprise (GSE)charters mandated mortgage insurance be used on loans where thedown payment is less than 20 percent.

Currently, mortgage insurance is used on about 20 percent of allloans originated, he says, and it pays costs associated withdefaulted loans, including interest charges during the delinquencyperiod, home maintenance, and legal fees.

Schwarzenegger Vetoes Life Settlement Bill

California Gov. Arnold Schwarzenegger has vetoed a bill thatwould update the California life settlement laws by changing thelaws to refer to “life settlements,” rather than to “viaticalsettlements,” and by stating that some types of trust-owned lifeinsurance arrangements violate state insurable interest laws.

The bill would require life and disability agents to keep theirlicenses in good standing to retain the right to handle lifesettlement business, and it would impose a number of otherrequirements, such as life settlement license requirements forindividuals who arrange life settlements.

“While many of the provisions were agreed to by all the partiesinvolved, some of the provisions still are subject to worthwhiledebate,” Schwarzenegger wrote. “It is my desire to ensure that lifesettlement transactions contain proper notification and disclosureto consumers. I am also concerned that the final version of thebill may unfairly exclude some companies from participating in thelegitimate life settlement market.”

P/C Sector First-Half Net Drops 57.4 Percent

Battered by deteriorating investment and underwriting results,the U.S. property/casualty insurance sector's net income aftertaxes fell 57.4 percent to $13.9 billion in first-half 2008 from$32.7 billion in first-half 2007, two insurance industry groupsreported.

The data was released by the Insurance Services Office and theProperty Casualty Insurers Association of America (PCI). Overall,the industry's profitability measured by annualized rate of returnon average policyholders' surplus (or statutory net worth) droppedto 5.4 percent in first-half 2008 from 13.1 percent in first-half2007, according to ISO and PCI.

They reported insurers sustained $5.6 billion in net losses onunderwriting in first-half 2008–a $20.2 billion adverse swing frominsurers' $14.5 billion in net gains on underwriting in first-half2007.

The combined ratio–a key measure of losses and otherunderwriting expenses per dollar of premium–worsened to 102.1 inthe first half of this year from 92.7 in the first half of2007.

It was the worst first-half underwriting result since the 105.1combined ratio for the first half of 2002, the companies said,adding that the combined ratio for first-half 2008 comparesfavorably with the 104 percent average for all first halves sincethe start of ISO quarterly data in 1986.

Insurers' net investment gains–the sum of net investment incomeand realized capital gains (or losses) on investments–fell 18.4percent to $24.8 billion in first-half 2008 from $30.3 billion infirst-half 2007.

Allianz to Help Out Hartford With $2.5 Billion

Multiline insurer The Hartford Insurance Group (HIG) has given astake in the firm to competitor Allianz AG for a $2.5 billion cashinfusion, It also informed investors it will take a huge charge inthe third quarter to account for a diminished investmentsportfolio.

Bank of America analysts said the total capital infusion couldbe $4.25 billion if Allianz decides to exercise warrants it wouldbe given in the deal. However, the analysts said, that would giveAllianz a total 30 percent stake in the company.

In other moves designed to reassure markets and preserve cash,HIG also said it will cut its dividend and named a new chiefinvestment officer, Greg McGreevey, a former ING executive.

The stock market appeared to like the move. HIG stock was upalmost 18 percent in heavy trading on the New York Stock Exchange.That was in contrast to overall trading, with U.S. stock marketsopening sharply lower amid signs the problems facing U.S. financialinstitutions are spreading to European banks.

HIG's stock has declined precipitously over the past few monthsas the financial turmoil mainly affecting investment banks hasmoved into the insurance sector.

The stock has been as high as $99.52 over the past 52 weeks butdropped below $26 at one point as the turbulence in financialmarkets overtook insurers.

Another factor was a decision by Fitch Ratings to revise itsrating outlook for HIG from stable to negative. Fitch citedpotential troubled assets, such as mortgage-backed securities inits portfolio, as well as the annual deferred acquisition costanalysis HIG does in the third quarter.

McGreevey joined the company in August. He will become anexecutive vice president of HIG and president of HartfordInvestment Management Company, the firm said. He succeeds DaveZnamierowski.

Hartford CEO Ramani Ayer said McGreevey and his team “areimmersed in our portfolio, evaluating our investments and setting acourse to navigate in this very volatile marketplace.”

Ayer said the decision to change investment managers was madebecause, “given the recent unprecedented turmoil in the financialmarkets and its effect on the company's investment portfolio, weagreed it would be best to bring a fresh perspective to ourinvestment operations.”

Legal Expert Foresees More U.S. Insurance Regulation

Congress will insist on “more uniform, more national regulation”next year in the wake of American International Group's liquiditymeltdown, a lawyer who heads an American Bar Association task forceon insurance modernization says.

“I see some form of federal regulation, maybe not in all linesand in all areas of regulation, but I predict more strict financialregulation of insurers,” says Fran Semaya, a partner at CozenO'Connor in Philadelphia.

She chairs the ABA's Task Force on Federal Involvement inInsurance Regulation Modernization, a part of the ABA's Tort Trialand Insurance Practice Section. She is also president of theInternational Association of Insurance Receivers.

“I don't see more deregulation, as in an optional federalcharter, but we will see more regulation, more than we bargainedfor,” she says.

She believes the level of federal involvement with insuranceregulation will depend on who is elected president, with Sen.Barack Obama, D-Ill., supporting greater regulation than Sen. JohnMcCain, R-Ariz.

“I think federal regulation will be on top of, rather than analternative to, state regulation,” she says.

Insurers Can Help Treasury Run Bailout

The U.S. Treasury Department wants to hire financialinstitutions–including big insurers–to help it manage portfolios ofwhole loans and troubled mortgage-related securities and to providecustodian, accounting, and auction management services formortgage-related assets.

Treasury has posted “financial institutions wanted” notices onthe Web. In addition to insurers, “financial institutions” eligibleto apply to help Treasury-manage troubled assets could includebanks, savings associations, credit unions, or security brokers ordealers.

The bidders for the securities contract must have at least $100billion in dollar-denominated fixed income assets under management.Bidders for the custodial services contracts must have at least$500 billion in domestic assets under custody.

Bidders for the whole loan contract must be managing a portfolioof at least $25 billion in mortgage loans or give other evidencethey can handle a giant mortgage loan portfolio.

Bidders also must be “established and regulated under the lawsof the United States or any state, territory, or possession of theUnited States,” officials write in the Web notices.

Central banks and institutions owned by foreign governmentscannot bid for the asset management contracts.

Fitch: Capital Buffers May Protect Life Insurers

Fitch Ratings says it may reduce the ratings of a number ofinsurers and reinsurers in coming weeks as a result of the currenteconomic turmoil.

Rating cuts triggered by writedowns of investments could affectthe life, health, title, and property/casualty sectors in theUnited States as well as life and property/casualty in France,Germany, Italy, Switzerland, and the United Kingdom, according toanalysts at Fitch, London.

“Fitch believes liquidity could become pressured for some lifeinsurance companies as well as some reinsurance companies,especially if they experience declines in their credit profilesthat lead to erosions in market confidence,” the analystswrite.

But Fitch believes “life insurers will be able to cope because,prior to the current rolling instability in worldwide financialmarkets, many life insurers had built up significant capitalbuffers, following a period of favorable investment marketconditions,” according to Fitch analysts.