Disaster losses, reserve charges, price pressure might make boom short-lived

The property-casualty insurance industry didn't just experience its best first-quarter underwriting result on record in 2005. The 91.9 first-quarter combined ratio was the best result for any quarter, period, according to the record-keepers.

In a joint announcement last week, the Jersey City-based Insurance Services Office and the Property Casualty Insurers Association of America in Des Plaines, Ill., noted that their quarterly records only go back to 1986. Still, the result was one to savor and piggybacks on another record set in 2004, when the full-year combined ratio of 98.1 was the lowest since 1978.

The ISO/PCI industry figures for first-quarter 2005 are consolidated estimates based on the reports of insurers that account for roughly 93 percent of the business written by U.S. p-c insurers.

Accompanying this article, National Underwriter provides some details behind the aggregate figures, showing net income and underwriting results for the 25-largest U.S. p-c insurance groups.

These figures (drawn mainly from statutory filing information in the National Association of Insurance Commissioners Annual Statement Database, compiled by National Underwriter Insurance Data Services/Highline Data) show that not only did 22 of the 25 report first-quarter combined ratios below the breakeven figure of 100, but 10 reported combined ratios under 90.

With the publication of industrywide first-quarter numbers coming in late July, at the same time p-c insurers individually started to announce their second-quarter results, it's tempting to refer to the first-quarter figures as the industry's “late, great” results. (The delay arose from data reporting problems associated with restatements, including that of New York-based giant American International Group.)

Will the “late, great” results be the “last great” quarterly results for 2005? Experts began debating the question in commentaries published with the ISO/PCI announcement.

The first-quarter combined ratio of 91.9, “coupled with what appears to have been a good second quarter, virtually assure another underwriting profit in 2005,” noted Robert Hartwig, senior vice president and chief economist for the Insurance Information Institute in New York, in his analysis.

However, the assurance was short-lived as his commentary went on. The first-quarter combined ratio “implies an underwriting profit of $28.6 billion on an annualized basis, [but] its realization is anything but certain,” he said, pointing to the possibility of significant disaster losses and reserve charges during the second half.

While this year's first major storm–Hurricane Dennis–will mean insurer payouts totaling $900 million, according to an estimate released by ISO's Property Claims Services, the figure falls well short of any of the four hurricanes that damaged insurers' third-quarter results last year.

As for reserve charges, some insurers and reinsurers aren't waiting until the third or fourth quarter to shore up their books. Already in the second quarter, XL Capital, Ltd. announced that it would boost net reserves in its North American reinsurance operations almost $200 million, while Munich Re said its American subsidiary would get a $1.6 billion hike.

A record-setting industry surplus level (up 2.1 percent from Dec. 31, 2004, to $401.8 billion) is also a double-edged sword, warned Mr. Hartwig. It means insurers face the dilemma of how to produce reasonable rates of return in the face of rising surplus, he noted. “The 'solution' of the 1990s–slashing prices and broadening terms and conditions to gain market share–is certainly not a smart option,” he said.

However, noted John J. Kollar, ISO's vice president for consulting and research, “we are already seeing signs of an increase in competition that could undermine insurers' profitability going forward.”

He said that premium growth, which peaked at 16.8 percent in third-quarter 2002, has now dwindled to just one-seventh of that–coming in at 2.4 percent for first-quarter 2004. The comparable growth figure in first-quarter 2004 was 4.6 percent, and 12.3 percent in first-quarter 2003.

Among the top-25 insurers, only two managed double-digit growth rates in the first quarter, and 11 reported declines.

Mr. Hartwig said premium growth is negative in inflation-adjusted terms for the first time since 1999–negative-0.6 percent, to be exact. He added, however, that the deceleration in growth “does not signal a wholesale loss of pricing discipline.” Some of it–in lines such as personal auto, homeowners and, to some extent, workers' compensation–is associated with favorable underlying loss cost trends, he said.

As they began announcing individual results for the second quarter, executives shared mixed reviews of the market but still reported combined ratios south of 95.

At Seattle-based Safeco–where second-quarter premiums grew 3.6 percent and the combined ratio came in at 89.1–outgoing Chief Executive Mike McGavick said that “conditions certainly continue to change, but they're only changing slightly. We're not seeing some aggressive new data out there. We're just seeing it continue to become a bit more competitive.” He added that he saw no evidence of “overtly irrational competition.”

In contrast, ACE CEO Evan Greenberg said that while “there are a number of incumbent companies trying to hold what they have and maintain discipline…there are also a number of competitors trying to grow in an…irresponsible fashion.” ACE's net premiums grew just 1.7 percent in the second quarter, although its combined ratio was a stellar 90.4

“Much of our focus…was on preservation of renewals,” Mr. Greenberg said. “New business was hard to come by, and business that went to market was often lost to competition for much greater price reductions,” he added, noting that such reductions could be from 30-to-50 percent.

At Everest Re Group, Chairman and CEO Joseph Taranto said that “it's an underwriters' market,” contrasting today's conditions to a few years back when “you didn't have to be that sharp as an underwriter and you still would have made a buck” on most lines.

Today's market “is more realistic,” he said, suggesting that focused underwriters who pick and choose risks correctly can still enjoy reasonable growth.

Everest–which reported a 2 percent increase in net premiums and a second-quarter combined ratio of 91.3–saw an 18 percent jump in U.S. reinsurance premiums.

“Finally, we saw a response to the four hurricanes that happened last year,” Mr. Taranto said, noting that his company saw opportunities emerging in the catastrophe reinsurance segment as Florida homeowners, commercial property and catastrophe reinsurance rates all climbed for July 1 policies.

However, the California workers' comp market is a different story. While legislative reforms are working to reduce loss costs to a point that justifies lower rates, good results have drawn competition to the market. “That market has gone from what was a terrific market to…an okay market,” he said.

Table for 24: was By The Numbers, this is new flag and head

Flag: Boom Times

Head: Net Income Still On The Rise

Caption:

While the industry saw a big improvement in its underwriting and profit performance in the first quarter, the question is whether increasing competition and other factors might end the party sooner rather than later.

Special Reports /

P-C Industry Reports Best Quarter Ever

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