NU Online News Service, Aug. 27, 4:02 p.m. EDT

Today's report of government numbers revising economic growth downward were not something insurers wanted to hear--nor were indications from analysts that the property and casualty market will not see a reversal in pricing or earnings anytime soon.

The U.S. Government today revised its second-quarter estimate for gross domestic product to 1.6 percent from an earlier forecast of 2.4 percent for the quarter.

The Bureau of Economic Analysis said the revision in the forecast was primarily due to "a sharp acceleration in imports and a sharp deceleration in private inventory investment."

These figures could impact the strategies of insurance executives as they consider how to grow their businesses, said Howard Mills, chief advisor for Deloitte Services LP's insurance practice.

"This downward revision is certainly going to cause the industry to question its growth assumptions, and it is an issue that is really going to impact them, no doubt," observed Mr. Mills.

Executives realize they need a "robust economy" in order to achieve organic growth, he noted. Without that, the latest figures may make them alter strategies and "speed up" acquisition plans.

As far as impacting the current soft market, he said there is no indication of a change coming soon, and the industry appears to be saying that no change will come without a significant event impacting the current pricing direction.

Robert Riegel, managing director for Moody's Rating Service U.S. Insurance Team, said the property and casualty business continues to be impacted by the slow economy as their commercial clients purchase less insurance. A downturn in housing means less need for construction insurance products. Less work

means fewer employees, in turn affecting employee benefits and workers' compensation insurance. It also has an impact on transportation, since fewer vehicles are being used.

The key issue for p&c companies is the pricing cycle, he said.

"With lower GDP you are going to get lower premium [volume], but the more important factor is just the pricing cycle, and that has been driving premiums down in addition to the weak economy over the last couple of years," said Mr. Riegel.

In a report on company profitability, Fitch Ratings said that while company net earnings have improved substantially over last year for the first half of 2010 to $16.2 billion, operating profits have declined.

In a review of 50 publicly traded p&c insurers, Fitch said the increase in earnings was primarily due to improvement in investment results, especially for larger insurers. The results show insurers have experienced "unusually high catastrophe losses and the deteriorating commercial insurance pricing environment combined to more than offset the continuing benefit of favorable loss reserve development, resulting in lower underwriting margins and a corresponding decrease in operating profitability for most companies."

Fitch said favorable loss reserve development represented 3.7 percent of earned premium compared with 2.6 percent during the first half of 2009 for the insurers reviewed.

"Profitability will continue to be pressured by limited premium growth and weaker accident year loss ratios in a stubbornly competitive insurance market with a weak economic recovery and low investment yields," Fitch said.

The use of reserve releases to improve earnings "have approached exhaustion for many insurers," said Fitch, and that could mean a turnaround in the soft market trend.

In an analyst report from Stifel Nicolaus, Meyer Shields said despite the use of reserves, there is no clear indicator of a change in the pricing trend. However, it is the analyst's belief that reserve releases will slow

this year and into next. As insurers approach the historical trigger point for rate increases, a calendar year combined ratio of 110, a hard market could begin by 2012.

Special Reports /

Continued Economic Weakness No Benefit For Insurers

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