Best: P-C Still Underreserved:Corrected Version

NU Online News Service, April 14, 2:54 p.m. EDT?Property-casualty insurers reported ?vastly improved' 2003 operating results with a double-digit jump in surplus compared to the previous year, but the sector faces slowing rate increases and continuing adverse developments, A.M. Best Company said.[@@]

However, according to the yearly review by the Oldwick, N.J.-based ratings agency, the industry is "significantly underreserved and that adverse development will continue to erode near-term earnings throughout 2004."

Best's positive finding was that the industry-wide net income came in at some $30.8 billion for 2003, much higher than $9.2 billion reported during 2002, while the overall combined ratio for the sector dropped to 100.1 from 107.4.

Net premiums written, Best said, rose to $412.8 billion from $378.9 billion, while net premiums earned increased to $394.5 billion from $357.5 billion reported during 2002. At the end of 2003, the industry's surplus improved to $355.8 billion, from $291.1 billion at the end of 2002.

All numbers, A.M. Best noted, are based on a compilation of insurers that write 99 percent of the p-c industry's premiums.

The good news during 2003, the ratings agency commented, came as the sector began to realize the full benefits of the hard market through earnings, and the positive news is expected to continue this year as 2003 price hikes are fully earned.

However, the ratings firm cautioned, the peak of the cycle is "already in the rearview mirror," with rumblings of price competition and questions on the lifespan of improved market conditions looming large.

Best also pointed out that improved financial results last year weren't spread equally among the insurers?the firm commented that carriers with conservative balance sheets and underwriting discipline have enjoyed the fruits of the hard market, while less fortunate companies saw the growth chance limited by their capacity.

"Expectation of windfall earnings that were to be harvested easily from the hard market," Best said, "has evaded the insurers that lacked the necessary financial positioning and strategic vision to take advantage of market opportunities."

Another worry for insurers is the pressure on investment yields?as the long-awaited upturn in interest rates didn't materialize in 2003 as well as during the 2004 first quarter.

Furthermore, even the surplus rise last year, after three consecutive years of surplus cut, comes with a caution. The ratings firm said that the sector still suffers from "unrecognized industry loss-reserve deficiencies, heightened reinsurance recoverables and elevated financial leverage."

Best also said the increase in net premiums written was less than adequate last year. The nine percent increase in net premiums written, the ratings firm commented, shows a slowdown compared to 2002, when the sector marked a 14.9 percent jump. "This is hardly good news for insurers in several market segments," according to Best, "given how poorly accident-years 1997-2001 were priced, which is evidenced by the adverse loss-reserve developments attributed to these accident years."

The reserve charges seen in 2003?although less than what had been recorded the previous year?also worried A.M. Best. In 2003, the industry saw some $13.9 billion of adverse loss-reserve development, the ratings firm said, consisting of around $7 billion in core reserve charges and $6.9 billion in asbestos and environmental liabilities. These charges, overall, are lower than the $16.5 billion in adverse loss-reserve development posted during 2003.

Nonetheless, Best said, the charges are still significant and they continue to hurt insurers' financial improvements.

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Best: P-C Still Underreserved:Corrected Version

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