S&P Publishes P/C Insurer Report Card

June 17, 2004

Industry-wide price strengthening was a driving factor in the financial results of U.S. property/casualty insurance companies in 2003, according to an industry report card published by Standard & Poor’s Ratings Services.

Because of some easing of competitive pressures and the need to relieve capital constraints, this segment experienced improved operating performance for the year. However, Standard & Poor’s ratings actions in the sector since Oct. 29, 2003, have reflected a historical negative trend. During the past seven months, Standard & Poor’s has taken 12 rating actions on U.S. property/casualty companies or groups, which include outlook revisions, revisions to CreditWatch status, and actual ratings changes. Nine out of 12 rating actions were negative.

Personal Lines
A favorable rate environment and positive loss controls are having a positive impact on profitability for both the homeowner and automobile lines. According to the Insurance Services Office (ISO), the personal lines industry achieved a combined ratio of 97.7% for 2003, a major improvement from 104.5% in 2002 and more than 120% in 2001.
Standard & Poor’s sees continued improvement in pricing adequacy, though at a more modest pace.

There is real potential that price strengthening for automobile insurance lines over the near term might not sustain 2003 increases. With auto insurance companies once again achieving strong profitability, competitive pressures are once again being felt. For homeowners lines, Standard & Poor’s has noted a decline in noncatastrophe losses in addition to reduced catastrophic claims. However, homeowner rates are expected to continue to rise, primarily driven by rising construction costs and expensive natural disasters.

Commercial & Specialty Lines
Two distinct trends are driving the financial strength of the commercial lines sector: improved pricing on current business and the continued overhang of reserve inadequacy for legacy business, such as asbestos and workers’ compensation. Improved pricing is kicking in, helped by tighter terms and conditions, and that’s leading to significantly better operating results. Standard & Poor’s expects pricing to remain modestly ahead of claims inflation through 2004 and to boost operating performance into 2005.

For 2003, ISO reported that commercial lines writers achieved a combined ratio of 101.2%. This marks a considerable improvement from 109.8% for 2002 and 121% in 2001. Nevertheless, there are a few mountains to move before ratings can turn around, the largest being massive increases in industry reserves for future payouts. By now, it is a familiar pattern: When insurers have issued policies too cheaply in prior years, and the claims on those policies are going to pay out over an extended period, they eventually realize that reserves for coming payouts are going to be too small. As a result, when pricing is strong, a real opportunity presents itself for reserve strengthening. In spite of significant reserve strengthening announced in 2003, there is the real potential for this trend to continue. Standard & Poor’s ratings in many instances incorporate estimated shortfalls, but if actual shortfalls are greater than expectations, further rating actions could result.

The report card, titled “Industry report Card: U.S. Property/Casualty
Insurers,” is available at www.standardandpoors.com.

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