Best: Industry Well-Capitalized, But Concerns Remain
NU Online News Service, Nov. 22, 3:38 p.m. EST?Property-casualty insurers, thanks to vastly improved operating earnings last year and unrealized capital gains, have achieved a 21.8 percent increase in their industry's overall surplus, a new A.M. Best report said.[@@]
But the ratings agency also cautioned that on a company-by-company basis, it is still seeing many worrisome situations that are causing ratings downgrades.
Enhanced operating earnings and unrealized capital gains, Best said, "have propelled the industry's surplus to record levels, and continued operating improvements have led to profitable midterm results in 2004."
The Oldwick, N.J.-based rating firm's comments came in its report titled "At Risk, Yet Sound." Best noted that the industrywide policyholder surplus was $353.84 billion at the year's end in 2003, up from $290.628 billion in 2002.
Best calculated in its report that the p-c industry's surplus overall has been propelled to record levels.
The firm did point out, however, that the capital adequacy still varies from company to company, but said that despite risks that expose individual insurers to potential shortfalls, "the p-c industry in total maintains capitalization that adequately supports its asset, credit and underwriting risks, in aggregate."
The Best report stated that "as of year-end 2003, the industry experienced an increase in risk-adjusted capitalization when compared with the prior year.
"It found, moreover, that nearly $44 billion of contributed capital during the years 2001-2003 has served various roles, from fuel for growth engines to life preservers, for insurers managing the challenges of the underwriting cycle."
A.M. Best also commented that as far as ratings actions are concerned, "downgrades continue to outpace upgrades for the fourth-consecutive year" because not every carrier has managed to capitalize on the recent hard pricings.
Further, as the market cycle continues to turn, many companies are in a "challenging position" to sustain their respective capital bases, the report stated.
Best also cautioned that it has observed some "extremely optimistic accident year 2003 loss ratios" and that it believes that many insurers will soon have to shore up even the most recent accident years in the near term.
The Best report stated also that the amount of ratings downgrades since 2001 can be attributed to the "overall decline" in capitalization in the context of increasing underwriting risks and the overall earnings volatility.
Best said the ratings picture could brighten in coming months, as the report acknowledged, "downgrade activity has subsided in 2004," reflecting Best's stable outlooks on the reinsurance and personal lines sectors while still keeping the negative outlook on the commercial lines segment.
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