A.M. Best: P/C Industry Notes Strong Q3 Results, But Reserve Development, Rate Deceleration Emerge

December 15, 2003

The property/casualty industry reported strong premium growth and vastly improved underwriting results during the first nine months of 2003, compared with the same period of 2002, according to A.M. Best Co.

Driving these results reportedly are the benefits derived from compounded annual price increases and improved underwriting fundamentals in each of the industry’s main sectors: reinsurance, commercial lines and personal lines.

However, as was the case during the first and second quarters of 2003, the increase in premium writings represents a deceleration in premium increases from the reported full calendar-year 2002, when annual premiums increased approximately 15.3 percent over 2001.

According to the report, this is hardly good news for insurers in several key segments, given how poorly accident years 1997 to 2001 were priced, which is evidenced by the adverse loss-reserve development that has consumed a conspicuous portion of improved current-year underwriting results in recent reporting periods – approximately $4.75 billion in the third quarter of 2003 alone. Rate increases, rigid policy terms and coverage restrictions applied through the past several renewals dictated a sharp reduction in underwriting losses to $5.2 billion in the first nine months of 2003, down from $19.0 billion in losses during the comparable period in 2002.

As price increases surely drove the majority of the industry’s significantly improved underwriting performance, reinforced underwriting fundamentals continued to complement those increases as underwriting results benefited from more restrictive policy terms and conditions.

Further, market dynamics such as competitors’ withdrawals in certain lines of business, combined with limited capacity – especially in certain primary and excess casualty markets – are keeping pricing advances alive in the near term. Despite increased premiums on a percentage basis, the velocity of rate increases continues to moderate, reflecting heightened price elasticity and the rumblings of competitive market forces driving down prices. Additionally, it’s apparent that property rates have reached the peak of the pricing cycle, especially in commercial primary and excess lines.

A.M. Best believes that, barring any severe catastrophe or another significant decline in the equity markets during the fourth quarter, 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 asbestos and environmental charges, adverse development on core loss reserves – particularly in the commercial-lines segment – and continuing investment challenges.

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