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

A.M. Best Co. rating service is increasing its combined ratio loss estimate for the property/casualty industry by close to five points from its projection at the beginning of the year, pushing the figure over 100.

Best reports its 2008 estimate for the overall industry rises from a just-profitable January projection of 98.6 to 103.2. The forecast 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 in the first half of the year, and significant underwriting losses reported by mortgage and financial guaranty insurers, according to Best.

Penn Treaty Stops Selling New Policies

Long-term-care insurer Penn Treaty American Corp. has suspended sales of new policies and voluntarily agreed to submit a rehabilitation plan to the Pennsylvania Insurance Department on Jan. 1, 2009.

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

Penn Treaty reports its primary insurance subsidiary will become insolvent under the plan unless new financing is found to replace reinsurance agreements that recently were terminated. The company says its subsidiaries have notified their primary reinsurer, Imagine International Reinsurance Ltd., they intend to take back all policies reinsured under several agreements Jan. 1.

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

Gimmick Loans Avoided Mortgage Insurance

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

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

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

Currently, mortgage insurance is used on about 20 percent of all loans originated, he says, and it pays costs associated with defaulted loans, including interest charges during the delinquency period, home maintenance, and legal fees.

Schwarzenegger Vetoes Life Settlement Bill

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

The bill would require life and disability agents to keep their licenses in good standing to retain the right to handle life settlement business, and it would impose a number of other requirements, such as life settlement license requirements for individuals who arrange life settlements.

“While many of the provisions were agreed to by all the parties involved, some of the provisions still are subject to worthwhile debate,” Schwarzenegger wrote. “It is my desire to ensure that life settlement transactions contain proper notification and disclosure to consumers. I am also concerned that the final version of the bill may unfairly exclude some companies from participating in the legitimate 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 after taxes fell 57.4 percent to $13.9 billion in first-half 2008 from $32.7 billion in first-half 2007, two insurance industry groups reported.

The data was released by the Insurance Services Office and the Property Casualty Insurers Association of America (PCI). Overall, the industry's profitability measured by annualized rate of return on average policyholders' surplus (or statutory net worth) dropped to 5.4 percent in first-half 2008 from 13.1 percent in first-half 2007, according to ISO and PCI.

They reported insurers sustained $5.6 billion in net losses on underwriting in first-half 2008–a $20.2 billion adverse swing from insurers' $14.5 billion in net gains on underwriting in first-half 2007.

The combined ratio–a key measure of losses and other underwriting expenses per dollar of premium–worsened to 102.1 in the first half of this year from 92.7 in the first half of 2007.

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

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

Allianz to Help Out Hartford With $2.5 Billion

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

Bank of America analysts said the total capital infusion could be $4.25 billion if Allianz decides to exercise warrants it would be given in the deal. However, the analysts said, that would give Allianz 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 chief investment officer, Greg McGreevey, a former ING executive.

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

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

The stock has been as high as $99.52 over the past 52 weeks but dropped below $26 at one point as the turbulence in financial markets overtook insurers.

Another factor was a decision by Fitch Ratings to revise its rating outlook for HIG from stable to negative. Fitch cited potential troubled assets, such as mortgage-backed securities in its portfolio, as well as the annual deferred acquisition cost analysis HIG does in the third quarter.

McGreevey joined the company in August. He will become an executive vice president of HIG and president of Hartford Investment Management Company, the firm said. He succeeds Dave Znamierowski.

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

Ayer said the decision to change investment managers was made because, “given the recent unprecedented turmoil in the financial markets and its effect on the company's investment portfolio, we agreed it would be best to bring a fresh perspective to our investment 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 liquidity meltdown, a lawyer who heads an American Bar Association task force on insurance modernization says.

“I see some form of federal regulation, maybe not in all lines and in all areas of regulation, but I predict more strict financial regulation of insurers,” says Fran Semaya, a partner at Cozen O'Connor in Philadelphia.

She chairs the ABA's Task Force on Federal Involvement in Insurance Regulation Modernization, a part of the ABA's Tort Trial and Insurance Practice Section. She is also president of the International Association of Insurance Receivers.

“I don't see more deregulation, as in an optional federal charter, but we will see more regulation, more than we bargained for,” she says.

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

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

Insurers Can Help Treasury Run Bailout

The U.S. Treasury Department wants to hire financial institutions–including big insurers–to help it manage portfolios of whole loans and troubled mortgage-related securities and to provide custodian, accounting, and auction management services for mortgage-related assets.

Treasury has posted “financial institutions wanted” notices on the Web. In addition to insurers, “financial institutions” eligible to apply to help Treasury-manage troubled assets could include banks, savings associations, credit unions, or security brokers or dealers.

The bidders for the securities contract must have at least $100 billion 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 portfolio of at least $25 billion in mortgage loans or give other evidence they can handle a giant mortgage loan portfolio.

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

Central banks and institutions owned by foreign governments cannot bid for the asset management contracts.

Fitch: Capital Buffers May Protect Life Insurers

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

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

“Fitch believes liquidity could become pressured for some life insurance companies as well as some reinsurance companies, especially if they experience declines in their credit profiles that lead to erosions in market confidence,” the analysts write.

But Fitch believes “life insurers will be able to cope because, prior to the current rolling instability in worldwide financial markets, many life insurers had built up significant capital buffers, following a period of favorable investment market conditions,” according to Fitch analysts.

Special Reports /

Best Says P/C Sector Combined Ratio to Rise More Than 100; Penn Treaty Stops Selling New Policies;

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