P&C Results Improve, But Insurers Still Face Threats

Last week, Oldwick, N.J.-based A.M. Best Company put out its review for the first three quarters of 2003, based on a compilation of results for property-casualty insurers that write 99 percent of the industrys premiums.

The review shows the industry as a whole producing strong premium growth and improved underwriting numbers for the first nine months compared to the same period in 2002. Net premiums written, for example, were up more than 10 percent to $313.7 billion, while the overall combined ratio dropped over five points to near the 100 break-even level.

The improvement in the combined ratio is particularly noteworthy in light of increased natural-catastrophe activity, from a series of thunderstorms last summer to Hurricane Isabel during the third quarter. The Jersey City, N.J.-based Insurance Services Office reported that catastrophe losses for the nine-month period added up to $9.4 billion, more than twice the amount during the same period in 2002.

For the fourth quarter, insured losses from California wildfires are also expected to take a heavy toll on results.

Still, it is good news for insurers that, barring any further unexpected severe catastrophes or a sudden stock market crash, 2003 will turn out to be the first year in three years to add to industry surplus.

New York-based Fitch Ratings offered a similar diagnosis of the industrys health during its teleconference last week to discuss 2003 and offer its predictions for the next 12 months.

"First, I think its safe to say we are looking for a continued recovery in industry performance, reflecting the hard market condition," said Fitch Managing Director Keith Buckley, during the teleconference. He added that "from the top-line perspective, we think premiums will be up about nine percent in 2003 and about six percent in 2004."

Overall, the industry is expected to show a "significant recovery in profitability" this year, following modest profits last year and its worst operating year ever the year before, he noted. "Consecutive rounds of sharp increases in premium rates and implementation of more conservative underwriting practices across nearly all business lines have improved market fundamentals," Mr. Buckley observed.

It is "a fascinating time to be an insurance industry observer" with so many different and opposing factors tugging and pulling at each other, he noted. However, he added that in general, "we think most market segments are now probably about adequately priced," and that, looking ahead, "our crystal ball says 2004 is likely the year that rates will start to soften."

Still, it is Fitchs position that when the market ultimately softens, it will do so at "markedly different rates, business line by business line." This will be quite a change from the emergence of the hard market, "which came in broad headline fashion after the events of Sept. 11, 2001," Mr. Buckley noted.

"The soft market will be harder to detect and may sneak up on many industry participants," he said. "So that means, for industry observers, you have to recognize that different companies will be affected at different paces, depending on their mix of business."

Currently, Fitchs median insurer financial strength rating in the p-c sector is "A-plus," while its median senior debt rating is "triple-B-plus," Mr. Buckley observed.

The Insurance Information Institute in New York is another industry observer that offered a generally positive review and forecast. Commenting on the current market environment, Robert Hartwig, chief economist at the Institute, said financial declines that insurers endured for five years came to an end this year, with another "solid year" ahead in 2004.

In addition, the Institutes annual survey of stock analysts and industry professionals found that premium growth, while decelerating, is expected to remain relatively strong in 2004. The survey participants forecast, on average, net written premiums rising 8.1 percent in 2004, thanks to increased prices and also higher demand for coverage as the overall economy continues to recover.

The Institute survey forecast that the industrys combined ratio will keep marching downward, from an estimated 101.7 for the current year to 100.7 projected for 2004, barring any unexpectedly major insured losses. (For more on the survey, see accompanying story on this page.)

However, despite the generally positive news expressed by various industry participants, there are also some developments that could spoil the industrys comeback.

A.M. Best notes in its report, for instance, that one worry is elevated reinsurance recoverables. The rating agency also questions the sustainability of the industrys improved combined ratio for the nine-month period for 2003, given the likelihood of significant loss-reserve adjustments and "one-time" charges slated for the current fourth quarter.

"One needs to look no further than comparing Sept. 30, 2002, results to year-end 2002," Best said, noting that the industrys combined ratio jumped more than two points during that time because of reserve additions.

Best also argues that the industrys loss-reserve position "continues to be short," with the bulk of problems remaining in commercial lines, including workers compensation, medical malpractice, directors and officers liability, and construction defect lines of business, as loss-cost trends rise due to medical-cost inflation, escalating jury awards and emerging class-action lawsuits.

Asbestos and environmental reserve problems also refuse to go way. "As anticipated, losses from asbestos and environmental reserves continued to affect 2003 results," the rating agency said, citing the potential for many more reserve additions for both asbestos and environmental liabilities and core reserves, as carriers take on "ground-up reserve studies."

"Less than half of the 30 most exposed companies in the industry have completed ground-up studies of their asbestos and environmental exposures," said the agency, which believes reserves for such liabilities "remain under-funded by $45 billion."

Fitch is also worried about reserve deficiencies. "Our biggest near-term concern continues to be reserve adequacy," said Mr. Buckley. "We have seen up to $10 billion of adverse development in the first three quarters of 2003, and we are looking for about 15-or-so billion dollars for the full year, as insurers continue to play catch-up."

About a month ago, Fitch held a teleconference on this very topic, "and there we mentioned that as of year-end 2002, we thought the overall deficiency for the industry ran in the $46-to-$77 billion range, which represents some 11 percent to 19 percent of reported reserves," Mr. Buckley commented.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 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.