P-C Results Improve, Hurdles Remain

"One factor" that will impact such good results going forward "is that you will have more catastrophes in third and fourth quarters, like Hurricane Isabel. Thats certainly going to have some impact," Ms. Horvath said.

Industry analysts noted that a small group of insurers would take the brunt of the earnings impact for Hurricane Isabel. (See related story, page 5). But A.M. Best forecast that, in general, the storm would not have much of an adverse impact on financial strength ratings in the p-c insurance industry, especially for highly rated companies.

In its report on the p-c industry's half-year results, released early last week, the ratings agency observed that for 2003, main drivers behind improving p-c results have been annual pricing hikes and enhanced underwriting fundamentals in each of the industry's main sectors: reinsurance, commercial lines and personal lines.

According to the A.M. Best data, net written premiums for the first half of the year rose some 12.6 percent over the comparable period in 2002, while the combined ratio dropped by around 4.4 points, to 99.3 from 103.7 last year.

Best said that these numbers are "even more significant" in light of continuing adverse loss-reserve developments–attributed primarily to asbestos and environmental liabilities and a significant increase in catastrophe losses.

Also noted in the report was a sharp decline in underwriting losses, from $10.2 billion recorded for the 2002 first half to $2.1 billion during the first half of 2003, thanks to rate hikes, rigid policy terms and coverage restrictions applied in the past several renewal periods.

Best also commented that gains from the hard market "began to flow to the bottom line" during the first six months of this year, as net income rose 159 percent to $18.6 billion in the 2003 first half, up from $7.2 billion during the comparable period last year. "The industry reported a much-needed 11.1 percent increase in surplus for the first half of 2003," Best said.

Additionally, the p-c industry has also enjoyed healthier investment results, as the net investment income jumped about seven percent to reach $20.7 billion for the first half of the year, up from $19.4 billion during the first six months of 2002.

But Ms. Horvath, commenting on the report, warned there are also other factors that could likely undermine insurers improving numbers. "For the calendar-year results, the staying power for these improvements is in question, because typically in the third and fourth quarters you see reserve-strengthening actions," observed Ms. Horvath.

And given the significant loss-reserve deficiency she believes exists in the industry as a whole, "I expect there will be charges like we have seen for many, many years in both third and fourth quarters."

On an accident-year basis, she also added, "we are saying the staying power remains in question because the industry in general is being a little overly optimistic in its current accident-year selections–meaning obviously you dont know your losses on a particular accident year for many years, particularly on the casualty side of things."

Ms. Horvath also commented, "When you see the more recent prior-accident years continuing to develop adversely and you are estimating that you are having improvements over those, you are probably saying your starting point is too low in terms of loss ratio you are improving from,"

The report from A.M. Best also pointed out that even with strong results, insurers are still toiling their way out of "a decade of soft pricing, accelerating loss-cost trends and a multiple-year capital-market quandary."

As for the high-priced hard market, the ratings agency said withdrawals in certain business lines–combined with limited capacity, especially in some primary and excess casualty markets–are helping to maintain pricing momentum.

Still, "the velocity of rate increases tempered, and it is apparent that property rates largely have reached the peak of the pricing cycle," Ms. Horvath observed.

"Yes, we are at the top of the market, but you know, its probably going to be a downhill from now. At least, the rate of increase is declining."

Looking into the rest of 2003, the ratings firm forecast the industry will generate favorable operating results and add to surplus for the first time in three years. "However," the report cautioned, "as was the case in 2002, A.M. Best believes that the benefits of the hard market will be diluted for the full-year 2003 by A&E charges, adverse development on core loss reserves–particularly in the commercial-lines segment–and potential investment challenges.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 19, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.