Property/Casualty Insurers Watch Profits Fly Out the Window

ISO, NAII Report First-Half Net Income for Insurers Plunged;
Fitch Adopts Negative P/C Outlook

It hasn’t gone to hell in a handbasket yet, but the outlook for the property and casualty industry is far from good.

On Sept. 14, Fitch, the international rating agency formed through the June merger of Duff & Phelps Credit Rating Co. and Fitch IBCA, revised its near-term ratings outlook for the U.S. property/casualty industry to negative from stable.

The day before, the Insurance Services Office and the National Association of Independent Insurers released a report showing the property/casualty industry’s first-half net income plunged by one third while surplus dropped and underwriting results deteriorated. Major catastrophes incurred during the second half of the year could compound increased loss costs.

According to Fitch analysts, the deterioration of results among many insurers with marginal financial strength is outpacing improvements being made by stronger companies.

“In the next 12 months, we expect a greater rate of downgrades than upgrades,” said Keith Buckley, managing director of Fitch.

Buckley said the rating agency has downgraded eight companies this year while upgrading only three, reflecting continued poor underwriting results in the P/C industry.

In January, Fitch analysts predicted the industry would record a 106 percent combined ratio for 2000. Revised predictions released Thursday show the industry’s combined ratio will be closer to 110 percent or 111 percent, based largely on a first-half ratio of about 109 percent.

Buckley added that rate increases will likely not outpace adverse reserving taking place with a number of companies.

Jim Auden, senior director at Fitch, said that in addition to struggling insurers Reliance Group Holdings Inc. and Frontier Insurance Group Inc., which have both taken charges to boost reserves this year, the potential that other companies will do the same is high.

In commercial lines, Auden said reserving deterioration is particularly bad in the workers’ comp segment where “there is the potential for some explosive reserve action in some cases.”

He referred to personal lines as “abysmal,” saying it is very unprofitable at a six-month combined ratio of 110 percent versus earlier 2000 predictions of 105.5 percent. Perhaps the most alarming statement Auden made was that 110 percent would be the floor for the year, though he did not speculate just how high the ratio could go.

Most of the problems, he continued, are taking place in the auto segment, particularly non-standard auto.

“The rising loss costs plus rate wars over the last few years have made this area particularly bad,” he said, adding that no near-term improvement can be seen.

The same conclusion
The ISO/NAII study affirmed Fitch’s remarks. According to their calculations, the $4.8 billion decline in net income after taxes in this year’s first half reflects a near doubling of the industry’s net loss on underwriting to $14.7 billion from $7.8 billion for first-half 1999.

The combined ratio deteriorated to 109.2 percent in the first half of this year, 4.4 percentage points worse than the 104.8 percent a year ago.

“The 109.2 percent combined ratio for the first half of this year is the worst underwriting result for the first half of any year since the 111.2 percent in 1994, when the Northridge earthquake struck southern California,” said John J. Kollar, ISO’s vice president for consulting and research.

“But, random swings in catastrophe losses can obscure underlying trends in fundamental underwriting results. Excluding catastrophe losses, the combined ratio for the first half of this year equals 107 percent, 6.1 percentage points worse than a year ago and the worst first-half combined ratio excluding catastrophe losses since the 107.2 percent in 1991,” Diana Lee, NAII’s vice president for research services, said.

The decline in the industry’s consolidated surplus from $334.3 billion at year-end 1999 to $326.7 billion at June 30, 2000 occurred despite $10 billion in net income after taxes and $1.4 billion in new funds paid in during this year’s first half. Factors contributing to the decline in surplus include $9.1 billion in unrealized capital losses, $6.3 billion in dividends to shareholders, and $3.6 billion in miscellaneous charges against surplus.

Insurers’ $9.1 billion in unrealized capital losses during this year’s first half compare with $3.4 billion in unrealized capital gains during the first half a year ago. The $6.3 billion in dividends to shareholders during this year’s first-half compare with $6.4 billion in first-half 1999. The $3.6 billion in miscellaneous charges against surplus is down from $6.5 billion in such charges during the corresponding 1999 period.

Topics Carriers Profit Loss Excess Surplus Property Market Property Casualty Casualty