Risk Managers Report Price Softening; Insurers Battle Surplus Decline

Property Premiums Fall Sharply; P/C Insurers Post Q3 Losses; Some Sell Stock to Raise Cash for Surplus Woes

Risk managers report that commercial policy renewal prices are continuing to drop even as insurers are battling a decline in statutory surplus.

According to RIMS Benchmark Survey, an industry survey of policy renewal prices as reported by North American corporate risk managers, property, with an 8.5 percent decrease in average premium, and general liability — which fell 9.6 percent — led the market down in the third quarter.

The average property premium fell sharply despite as much as $20 billion in insured losses from Hurricanes Gustav and Ike. The 9.6 percent decrease in average general liability premium is the largest single quarterly drop since 2005.

The falling prices continued as the U.S. property/casualty industry reported that its statutory surplus at the end of the third quarter is expected to decline as much as $42 billion, or 8 percent, from the beginning of the year, according to estimates from the professional services firm Towers Perrin.

Skyrocketing claims triggered by the meltdown of the subprime mortgage market slowed the rate of descent of the average directors’ & officers’ liability (D&O) premium, which fell by only 2.1 percent during the quarter, according to the RIMS Benchmark Survey. Excluding financial and real estate companies from the sample, the average decrease was 7.4 percent.

“Nearly five years of deteriorating rate levels are taking a toll on underwriting profits,” says Dave Bradford, executive vice president at Advisen. “A.M. Best forecasts a 2008 combined ratio of 104.0 for the commercial property and casualty industry. Together with lower investment returns as a result of the global credit crunch, conditions may be ripe for a reversal in the market cycle in 2009.”

Additionally, if the stock market doesn’t recover from steep losses precipitated in recent weeks, the surplus decline could approach $80 billion, or 15 percent, by the end of the year, Towers Perrin said.

Poor underwriting results, coupled with declining investment income, will contribute to a projected overall third-quarter industry net loss of $4.8 billion, the Towers Perrin analysts said.

Implications for Buyers

The third quarter results have implications for commercial insureds, according to Stephen Lowe, managing director of Towers Perrin’s global Property & Casualty Insurance practice.

“Buyers of commercial insurance will need to pay more attention to insurance purchasing decisions, and consider contingencies in renewal planning,” Lowe said. “The focus will now be on the quality of security offered by insurers.”

Lowe said buyers will also need to include insured claim liabilities in their overall management of counterparty risk. “Since the capability to estimate gross liabilities — rather than just net retained liabilities — is essential to measuring counterparty exposure, some companies may want to develop or refine these estimates,” he said.

Among the other industry findings reported by Towers Perrin:

• The projected industry combined ratio for the third quarter is 116.6 percent, producing an underwriting loss of $18.5 billion. Contributing factors are large catastrophe losses, continuing heavy claims for the mortgage and financial guaranty specialty insurers, emerging D&O claims and a general deterioration in pricing.
• About $30 billion of realized and unrealized losses on investments in Q3 statutory filings are plausible; write-offs due to investments in failed financial institutions could be in the range of 0.5 percent of invested assets.
• Towers Perrin’s most recent quarterly commercial lines insurance pricing and profitability trends (CLIPS) survey indicate that commercial insurance prices declined about 5 percent in the first half or 2008, on top of similar declines in each of the prior two years.

“The current situation will cause price levels to stabilize if not increase. While losses are widespread, we aren’t expecting any company failures; however, some downgrades from the rating agencies are likely,” Lowe said.

Third-Quarter Losses

Many property/casualty insurers took big hits to their third-quarter results, including Chubb, CNA, Travelers and The Hartford.

Chubb saw its third quarter profit cut by investment losses and Hurricane Ike but the New Jersey-based insurer still emerged with $264 million in net income, $300 million in operating income and a combined loss and expense ratio under 100 percent.

CNA Financial Corp. reported a $331 million net loss for the third quarter chiefly due to catastrophe claims and investment losses and said it will receive $1.25 billion from its parent, Loews Corp., to bolster its main insurance unit, Continental Casualty.

The insurer also said that its current CEO, Stephen Lillienthal, will step down at year’s end, which is earlier than planned, and be replaced by Thomas F. Motamed, a former Chubb executive who was not originally scheduled to take the helm until June 2009.

Travelers Cos. Inc.’s net income dropped to $214 million for the third quarter, down from $1.2 billion for the same period last year, as the company absorbed losses from Hurricanes Ike, Gustav and Dolly.

The Hartford Financial Services Group Inc. finalized a $2.5 billion capital investment by Allianz SE. The Hartford had announced the deal on Oct. 6. Ramani Ayer, The Hartford’s chairman and CEO, said the investment would strengthens his firm’s capital position and enhance its ability to weather volatile markets while competing for business.

Topics Trends Carriers Profit Loss Excess Surplus Pricing Trends Property Property Casualty Risk Management Casualty