A.M. Best Reports: P/C Premium Growth Solid

April 16, 2003

The property/casualty industry continued to report strong growth in net written premiums for both the fourth quarter and full-year 2002 amid robust price increases across all sectors, according to the A.M. Best Co.

Earnings for property/casualty insurers improved, despite another
round of heavy loss reserve charges compounded by a resurgence of natural catastrophe losses and soft financial markets that caused surplus to continue its downward slide. A.M. Best data shows that net written premiums rose approximately 11.6 percent in the fourth quarter and 15.7 percent for the full year, while the combined ratio improved to 107.2, from 115.7, for the year and to 113.0, for the quarter, from 120.2.

The industry’s improvement primarily reflects the dramatic decrease in catastrophe losses in 2002, as 2001 included approximately $9.1 billion of Sept. 11, 2001, losses that impacted the combined ratio by 2.9 points. The remaining improvement in the 2002 calendar-year combined ratio reflects improved rate adequacy, offset by rising loss costs that yielded a nearly eight-point improvement in the 2002 accident-year combined ratio.

The net underwriting loss in 2002 narrowed by 28 percent from the 2001 loss, excluding the Sept. 11, loss, and pretax operating income benefited from higher net investment income. Net income improved by a smaller margin in 2002 compared to 2001, excluding the effects of September 11, as depressed equity markets offered less realized capital gains and the industry resumed paying taxes.

The stock market was once again to blame for the 1.5 percent year-over-year decline in surplus, as unrealized capital losses were more than double net income, and exceeded the favorable spread between contributed capital and shareholder dividends.

Growing losses from asbestos loss reserve increases, driven by an increase in class-action lawsuits and manufacturer bankruptcies, added a notable 2.4 points to the annual combined ratio, compared to 1.4 points in the year prior.

Adjustments to core prior-year loss reserve estimates, particularly in the workers’ compensation and professional liability sectors, such as medical malpractice and directors and officers liability, accelerated in 2002 with the industry recording roughly $22 billion in adverse loss-reserve development on accident-years 2001 and prior – including almost $8.5 billion for asbestos and environmental losses – in calendar-year 2002. As is typically the case, the fourth quarter was impacted by a disproportionate amount of reserve charges, with AIG and Travelers leading the pack with nearly $2.8 billion and $2.5 billion of strengthening on a pretax net basis, respectively. Despite these actions, A.M. Best believes the industry’s reserves continue to be significantly short, with the bulk of the deficiency housed in the commercial-lines sector.

While rates continued to firm, A.M. Best believes pricing in a number of large market segments, particularly homeowners, commercial multiple peril, medical malpractice and workers’ compensation is still below adequate levels.

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