A dozen Wall Street analysts are predicting an average combined ratio of 98 for 2006 for the property-casualty insurance industry, but it could be even better, according to the developer of the annual "Early Bird" survey.
On the other hand, early predictions of a hardening market in 2006, with overall premium growth of 4.7 percent, will likely be tempered, Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute, told National Underwriter.
Explaining why the "Early Bird Forecast" of a combined ratio two points better than break-even for 2006 just published by the Institute is already ripe for revision, Mr. Hartwig said analysts were surveyed in mid-December, before nine-month results for 2005 were released by the Insurance Services Office and the Property Casualty Insurers Association of America.
The results, released on Dec. 27, indicated a nine-month 2005 combined ratio of 100–a result that suggests to Mr. Hartwig the analysts' combined ratio prediction for full-year 2005–105.3, on average–is well off the mark. "I think what every analyst underestimated is the resiliency of the industry in the face of large-scale disaster," he said, adding that in particular, "there may be more reinsurance out there than they [the analysts] realize."
For 2006–while analysts seem to be factoring a lower level of catastrophe losses into their overall combined ratio predictions, with an overall average of 98–they may still have overestimated the impact of even moderate-scale disasters, Mr. Hartwig said.
The 2005 results through nine months show that "very substantial amounts of the losses" are reinsured by carriers in London, Switzerland and Germany, taking them off the bottom lines of U.S. primary companies, he noted. Therefore, if analysts knew today there would again be $50 billion in losses in 2006, they would probably predict a lower combined ratio than 105–perhaps 100 or 99–because they've learned the lesson of two years of disasters, he added.
In 2004, analysts also generally overestimated the combined ratio and underestimated the resilience of insurers following four mega-storms in Florida, he said. In the Early Bird survey compiled in December 2004, analysts predicted a combined ratio of 100 for 2004, on average. The figure ultimately came in at 98.1.
For 2005, Mr. Hartwig also suspects the analysts' underlying assumptions for lines unaffected by natural catastrophe losses were pessimistic. The industry, for example, is performing better in the auto line, he said, noting that underlying loss-cost trends "have not accelerated rapidly, and we've not had a wild breakout of price-based competition that can't be justified based on loss costs."
"There has been competition," with most insurers cutting their auto rates over the past year, "but not to the point where it has done serious damage to the underwriting results," he said.
With respect to premium growth for the industry overall, missed forecasts indicating average growth of 2.5 percent for 2005 are telling Mr. Hartwig that "expectations of a renewed hard market in the wake of [2005] storms are probably overblown."
Noting that actual results through nine months showed net premiums down 0.5 percent (or up only 1.3 percent if a single distorting transaction between American Re and parent Munich is excluded), he said the analysts' premium expectations for 2006–averaging 4.7 percent–will likely "be ratcheted down."
The early views that the impact of Katrina and other storms would be "to prop up casualty market pricing, I think have been wrong from day one, and I think I'm being proved right on that."
"My view is the increases in price will be very limited in scale [and] scope," with the exception of commercial and residential property risks in the Southeastern Gulf, and corresponding reinsurance.
Mr. Hartwig said the Institute is now in the process of resurveying analysts, as it does every year, for a "Groundhog Forecast" due out in early February. While there historically has been little difference between the Groundhog and Early Bird survey results, this time Mr. Hartwig expects nearly all of the analysts to change all of their forecasts.
But a few analysts did already "pick up on the resiliency issue" with lower combined ratio forecasts for 2006, he said. In fact, the range of combined ratio predictions for 2006 extends from a 94 from Raymond James to 100.3 by Conning & Company.
A wider range of predictions for 2005 has both these firms closer to the 105.3 average (Raymond James at 104.1 and Conning at 103.3), while Firemark Investments came in with the lowest 2005 prediction of 100.2 (and 97.3 for 2006).
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