A.M. Best Says P/C Industry Maintains Improving Results, Staying Power Questioned

The property/casualty industry reported robust premium growth and considerably improved underwriting results during the first six months of 2003 over the comparable period of 2002. Driving these results reportedly are the benefits derived from compounded annual pricing increases and improved underwriting fundamentals in each of the industry’s main sectors: reinsurance, commercial lines and personal lines.

A.M. Best data reportedly shows that net written premiums rose approximately 12.6 percent over the comparable period in 2002, while the combined ratio improved by approximately 4.4 points to 99.3 from 103.7 in 2002. This is the first time in the past five years that the industry reported a combined ratio below 100 at midyear.

The improved underwriting results are even more significant in view of continued adverse loss-reserve development attributed primarily to asbestos and environmental liabilities and a significant increase in catastrophe losses, which collectively added 5.1 points to the six-month 2003 combined ratio.

Rate increases, rigid policy terms and coverage restrictions applied through the past several renewal periods dictated a sharp reduction in underwriting losses to $2.1 billion in the first half of 2003, down from $10.2 billion in losses during the first six months of 2002.

Reinforced underwriting fundamentals continue to complement pricing increases. Market dynamics such as withdrawals in certain business lines, combined with limited capacity, especially in some primary and excess casualty markets, are maintaining pricing momentum. However, the velocity of rate increases tempered, and it is apparent that property rates largely have reached the peak of the pricing cycle.

Supporting the industry’s continued progress in underwriting are improved overall investment results, as net investment income increased about 7.0 percent over the prior-year period to $20.7 billion in 2003 from $19.4 billion in 2002.

The collective impacts of solid underwriting results and relatively improved investment income fueled an exceptional increase in pretax operating income of 118.6 percent over the first half of 2002. Because of the improved operating performance that was further bolstered by a sizable unrealized capital gain reflecting improved equity market conditions, the industry reported a much-needed 11.1 percent increase in surplus for the first half of 2003.

Gains from the hard market began to flow to the bottom line during the first half of 2003, as net income dramatically increased by about 159.0 percent to $18.6 billion in the first half of 2003, up from $7.2 billion during the comparable period in 2002.

At midyear, the absolute percentage gains in overall operating statistics for the property/casualty industry are reportedly staggering. According to A.M. Best, it is essential to discern that despite considerable improvement in the most recent quarterly results, the industry still is toiling its way out of a decade of soft pricing, accelerating loss-cost trends and a multiple-year capital-market quandary.

A.M. Best believes that barring any severe catastrophe or another significant decline in the equity markets, the industry will generate favorable operating results and add to surplus for the first time in three years. However, 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.

BestWeek subscribers can download a free printed copy of the full 10-page special report, “P/C Industry Maintains Improving Results, But Staying Power Remains in Question,” or a combination of the printed report plus a spreadsheet file of the report data for $75 from www.bestweek.com. Non-subscribers can download a printed copy of this special report for $50 or a combination of the printed report plus a spreadsheet file of the report data for $125 from www.bestweek.com.