P-C Insurers Boast Best Results In Years

P-C Insurers Boast Best Results In Years

Michael Ha

The fourth-quarter earnings season saw many favorable financial results from property-casualty insurers, with the p-c industry as a whole poised to record one of its best underwriting performances in years for 2003.

Despite some hefty charges reported in earnings announcements, overall adverse developments in the fourth quarter were also less than what many had been expecting, according to some industry watchers.

Whats more, some analysts say, strong earnings will likely continue through 2004 and beyond, as rate hikes taken in 2003 are earned through this year and as carriers benefit from premium rates that continue to be favorable in general.

On the down side, however, analysts caution that the industrys overall reserve deficiency is still a real and persistent problem. The continuing low-interest-rate environment also means that many carriers will continue to see low investment returns. Since insurers cant count on high investment yields to boost their bottom lines, they will need to continue to focus on strong underwriting results to bolster earnings, analysts warn.

Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York, noted that 2003 fourth-quarter results were “generally good–basically as we expected.” However, he added, “Not surprisingly, you saw some companies take fairly large charges in the fourth quarter, like XL Capital Ltd. and a number of others.”

Jim Auden, senior director at New York-based Fitch Ratings, commented that insurers saw better results for full-year 2003 overall. “We projected a significant improvement in underwriting results this year, and they are bearing through in the fourth quarter,” he said.

“But there were also companies that had unfavorable results in the fourth quarter due to charges,” he added. “They are less than what we saw in 2002, but there were still some significant ones.”

For instance, XL, Chubb Corp., Travelers Property Casualty Corp. and The St. Paul Companies all had charges.

“Some smaller companies like Horace Mann and Harleysvillethey had some charges, which knocked them off the track a bit,” said Mr. Auden. “XLs charge was bigger than what people had thoughtthe magnitude of Chubbs asbestos charge was a surprise. But for St. Paul and Travelers, they are preparing to close their merger, so they had some charges before that, I suppose. I would say that, overall, the charges are less than what I have been expecting.”

Mr. Auden commented that Fitch Ratings still expects a number of individual carriers to report substantial charges in the current year, “but the frequency of these charges will probably go down from 03 to 04, just like it did from 02 to 03.”

Oldwick, N.J.-based A.M. Best Company observed that p-c earnings results were better for the most part in 2003 than they have been, “with the general improvement in market conditions, even though the accumulation of catastrophes was probably a little bit above average in 2003.”

One segment in particular noted by A.M. Best was the improving homeowners line. “I dont want to say it was a surprise, but a couple of years ago we were skeptical as to whether this could happen,” said Karen Horvath, analyst at A.M. Best. “Propertys been a pretty good line in the past couple of years. Thats where we have seen really big price increases. 2003 had some catastrophe losses, but they werent extraordinary.”

However, she said, medical malpractice is still showing poor results, as is general liability and product liability.

Ms. Horvath also noted that she is “definitely seeing that pricing gains are starting to slowwe are not seeing pricing decreases yet, except in the very large property area. But from everything we are hearing, pricing increases are starting to slow.”

On fourth-quarter reserve charges, she said that she had initially expected a lot of charges, “but we probably havent seen as much as we had anticipated.”

Still, she said, “we continue to see adverse developments at certain companies from, you know, the usual-suspects lines of business–whether from asbestos, workers compensation, some surety, certainly medical malpractice.”

Ms. Horvath said she continues to believe there is a reserve deficiency in the industry and that she has concerns over where companies are reporting current accident years. “We think 2002-to-2003 accident years may have been a little optimistic. You might see some adverse development in those accident years later, but not as significant as on the 1997-to-2001 accident years that have been really plaguing the industry.”

She added, however, that she no longer expects “the preponderance of mega-charges that weve seen over the past couple of years. Charges will be amortized over a longer period of time for companies that have remaining deficiencies.”

Morgan Stanley in New York offered another cautious view of the 2003 fourth-quarter adverse developments. William Wilt, an equity research analyst at Morgan Stanley, said he would characterize the fourth quarter as “mixed, as most companies came at or near our earnings estimate and consensus earnings. I would say there were a handful of positives and a handful of negatives.”

On the negative side of the ledger, asbestos was clearly in the news again.

“To us, that was truly a negative surprise,” Mr. Wilt said. “Of those companies that had taken big charges in, say, the fourth quarter of 2002 and the first quarter of 2003, we had thought that in most cases that would have put the problems behind.”

In fact, Mr. Wilt added, a number of companies came back and had to adjust their asbestos reserves again, “so that was a negative surprise, and we are cautious as we look at 2004 on asbestos.”

Morgan Stanley estimates roughly $4 billion of reserve charges in the 2003 fourth quarter and between $13 billion and $15 billion for full-year 2003 for U.S. property-casualty insurers. “So, in fact, reserve charges arguably werent quite as severe as we might have anticipated, but its still a whole lot of money, and we were surprised by the asbestos charges,” he observed.

Another negative development, according to Morgan Stanley, is that written premium growth moderated “very, very rapidly.”

“In some cases, it moderated more than what I was expecting,” Mr. Wilt said. “Its certainly that management has been managing expectations for some time that we are entering a new phase of the cycle that premiums could be expected to slow, but it still happened very rapidly. It also showed the impact of the new capacity thats in the insurance marketplace.”

Mr. Wilt said that the fourth quarter looks to be “a real transition quarter from hard market to what I describe as a steady state.”

“I dont think 'soft market' is the right way to describe 2004, but kind of moving from the hard market to a steady state,” he said. “Its clear that there is sufficient capacity to write most lines of business. I think underwriters, actuaries and agents are all trying to figure out the right price for risks and to strike that balance between earning a good return-on-equity without earning an excessive return-on-equity.”

Mr. Wilt also noted that property lines are clearly coming down faster than casualty lines, where margins are still expanding–although at a fairly slow or moderate pace.

On a more positive note, Mr. Hartwig from the Insurance Information Institute pointed out that in assessing 2003, when all is said and done, the p-c industry as a whole hasnt seen this kind of stellar underwriting performance in more than two decades. “It looks like we will see the best combined ratio in the p-c insurance business since 1979this is the best underwriting performance weve seen in 24 years,” he observed.

Mr. Hartwig said that when all the results are in for 2003, the industrys combined ratio will be “right about exactly 100.” He added that he expects the ratio to remain at around 100 for 2004 as well. “The last time we came anywhere close to that was in 1979, and the combined ratio was 100.6,” he said, adding that achieving a break-even combined ratio in this business is “a cosmic event.”

“It occurs with great infrequencyyou can spend your entire career almost and maybe only see this happen once or twice in the business,” he added.

“The property side pretty much leveled out last year,” he observed. “In casualty lines, results are improving, but the tort environment remains very problematic.”

On the personal lines side, there were “extraordinary underwriting results” for both State Farm Insurance Companies and Allstate Corp., noted Mr. Hartwig. “Right there you are talking about one-third of the personal lines market, and there was a mirror-image type of results for most of the personal lines market.”

On the commercial side, the 2003 results, while generally favorable, were more mixed. But reinsurers can lay claim to “the most-improved” award, he said. “They saw dramatic improvements in reinsurance results, going from combined ratios in excess of 102 on average down to below 100 on average.”

Marc Serafin, an analyst at Moody's Investor Service in New York, also noted that he had expected 2003 to be “an inflection point for things to start to improve.” He said the long-tail liability lines continue to produce volatility, while personal lines continue to perform a little better.

“The homeowners line has made a great recovery from a few years agothats due to underwriting changes and a lot more rate,” he said. “If you look at those three segmentslong-tail liability, personal lines and then commercial property linesyou are seeing some pretty strong profits and you are seeing competition heat up. So you are starting to see some pricing moderate and decrease in certain property-market segments.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 5, 2004. Copyright 2004 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.