ROE Outlook Bad For P-C, Says Ernst & Young

NU Online News Service, Dec. 9, 3:10 p.m.EST?Industry price competition makes the profit outlookfor the property-casualty insurance sector "pessimistic," aconsulting firm said today.[@@]

The gloomy prediction was issued by Ernst & Young in their"State of the Financial Services Industry Report."

Regulatory problems from investigations are more risk tocompanies' reputations than their finances, and "pricing trends,rather than catastrophe exposure, are the reason why the return onequity outlook for p-c insurers is pessimistic," the firm said.

E&Y noted that rate increases for total commercial policiesare now below 10 percent, and competition is driving them downfurther.

"Rate increases for the commercial property segment are now innegative territory, also foretelling lower ROEs. The hurricanes inFlorida may decelerate the rate of decline, but that won'tfundamentally alter the trend toward price reductions," the reportsaid.

According to the report, it is "only a matter of time before thetotal commercial line breaks the zero barrier and followscommercial property into negative territory."

Prevalent price-cutting remains something that insurers haven'tbeen able to avoid over the last century, E&Y said.

As personal lines of insurance rack up "robust" profits withcombined ratios in the mid-80s, "some major carriers have nowdecided that this is a good time to expand market share by reducingprices," the report said.

It noted filings for reductions by State Farm, saying the bigplayer's actions affect every other personal lines carrier.

E&Y said the industry's loss reserves look stronger than2002-2003, but noted one study suggesting that a $50 billionreserve deficiency remains. Overall the report found reserves"better than they have been in a long time."

With respect to rating agency actions, the firm said it expectsfew downgrades and little upward movement because the agencies areunlikely to increase them as the pricing cycle worsens.

The firm said that the scrutiny of broker activity by regulatorscould cause a power shift in the market "that may enable moreconsolidation than we have seen in the past."