As one property and casualty industry report points to risingcombined ratios for insurers, with experts citing the need forbetter underwriting results, a separate analysis of first-quarterindustry figures indicates the commercial-lines market may bestarting to turn.

Additionally, a third analysis shows that commercial-linesprices, while soft, are still 15 percent higher than at year-end2000, during the previous soft-market cycle.

A report of industry financialresults distributed by ISO, the Insurance Information Institute,and the Property Casualty Insurers Association of America showsthat although industry surplus is at record levels as of the end ofthe 2011 first quarter, insurers took a $4.5 billion underwritingloss, and recent developments point to worsening results in thesecond quarter.

Underwriting losses outpaced a 3.5 percent increase to $108.6billion in net-written premiums, compared to the same period a yearago. This is the first increase in first-quarter net premiumswritten since 2007 and the largest since 2004, says Michael R.Murray, assistant vice president of financial analysis for ISO.

However, the industry's combined ratio climbed to 103.3in the first quarter from 101.1 during the same quarter in 2010.First-quarter net income dropped to $7.8 billion from $8.9billion.

“The deterioration in underwriting profitability as measured bythe combined ratio is a particular cause for concern, becausetoday's low investment yields, together with the long-term declinein investment leverage that helped insulate insurers from theravages of the financial crisis and the Great Recession, meaninsurers need better underwriting results just to be as profitableas they once were,” says David Sampson, president and CEO of PCI,in a statement.

The underwriting news could be worse when second quarter resultsare announced. ISO's Property Claims Services unit sayssecond-quarter catastrophes caused $14.7 billion in insured lossesas of June 20 and losses from several other events need to be addedto the amount, Murray adds. Additionally, the stock markets aredown, which could mean capital losses on investments, he says.

“Yet these near-term negatives could have positive implicationsfarther down the road to the extent that they erase some ofinsurers' excess capacity and thereby hasten a turn in theinsurance cycle,” Murray theorizes.

However, David Paul, a principal for the firm ALIRT InsuranceResearch in Windsor, Conn., used a proprietary method to scoreP&C insurers and found that the first-quarter combined scorefor the top-100 commercial-lines writers reveals the firstindication in six years of a possible market turn.

Paul explained to NU earlier this year that ALIRTscores—derived every quarter from an analysis of operating andinvestment ratios as well as other financial-strengthmeasures—range from 0-100, with higher scores assigned to strongerinsurers. The 10-year median industry score is right in themiddle—at 50.

A composite score below 50 may act as a leading indicator of aturn, Paul says, explaining that the score can be viewed as a “paingauge” that can highlight the point when insurers “begin to getfearful about balance-sheet deterioration.” When the fear sets in,they may “draw firmer 'lines in the sand' as concerns pricing,”ALIRT says in its 2011 first-quarter analysis.

In its latest research, ALIRT says its composite score fellbelow 50 in the 2011 first quarter. 

The report shows that the score has been trending downward sinceearly 2007, but has been above 50 since the middle of 2005. Incontrast, back in 2001, the composite was closer to 35 as themarket turned from soft to hard.

Spotlighting another positive development—from the perspectiveof insurers—the ALIRT first-quarter analysis notes thatnet-and-direct premiums written for the P&C composite of 1,600insurers show marked upticks compared to last year's first quarter.Net premiums rose 3.6 percent over the prior first-quarter, anddirect jumped 3.5 percent.

The report notes that the upward trends were likely driven byexposure-unit growth, since pricing surveys continue to showdeclining year-over-year rates.

 Growth in exposures—demand—“combined with potentialexhaustion on the part of underwriters to chase price ever lower…isa positive development,” ALIRT concludes.

Meanwhile, despite falling commercial-renewal prices in thefirst quarter, a composite pricing index released by Advisen— aprovider of insurance-related data and research—shows that pricesare still 15 percent higher than at year-end 2000.

The Advisen index, based on reports from 1,200 risk managers,shows that average 2011 first-quarter commercial-renewal priceswere 2.4 percent lower than in the 2010 firstquarter.