After Record 2006, P/C Insurers See Promising 2007 Ahead

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Property/casualty insurers should be able to build on the momentum of 2006 to deliver another profitable year in 2007 if they maintain discipline on price, a group of industry observers told insurance executives attending the 11th annual Property/Casualty Joint Industry Forum.

In a session entitled View from the Outside Looking In, a panel comprised of an insurance commissioner, an industry analyst, a ratings agency analyst and an editor, agreed that 2007 and 2008 are looking good for P/C insurers.

Dr. Robert Hartwig, president and chief economist of the Insurance Information Institute, and moderator of the session, noted that 2006 was a record year for the property casualty industry, with net income after-taxes at nearly $60 billion, according to latest estimates. The industry also delivered its best return on equity in about 20 years—in the range of 14 percent.

“What is driving that is the industry’s very strong underwriting performance,” said Hartwig. “We are looking at potentially the best combined ratio in 60 years, maybe in the low 90s.”

This was due partly to the huge drop in insured catastrophe losses, which went from $62 billion in 2005 to just $8 billion in 2006.

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Dr. Hartwig on his analysis of 2006 results and his forecast for 2007

Looking ahead, Jay Gelb, senior vice president and senior nonlife insurance equity analyst, Lehman Brothers, said he expected industry earnings to remain at robust levels in 2007 and 2008, though perhaps lower than 2006 levels.

“Overall the industry’s returns probably peak in 2006 and part of that is because we had very low catastrophe losses last year,” noted Gelb. However, he added that the strength of the industry’s balance sheet would allow it to sustain these results going forward.

Brian Sullivan, editor, Risk Information, Inc., observed that the industry does not appear to be running down the slippery slope of price cuts right now. “We have seen more pricing discipline, particularly in personal lines in the last five years, than I have seen in my career. I think it is because no one knows what to do,” said Sullivan.

“Everyone wants to grow profitably but the question is how. I don’t think anybody has been in a situation where we are not cutting prices to grow market share,” he added. “This would change only if someone was to do something stupid, or there is an unexpected claims shock.”

Hartwig noted that the industry is expecting net written premium growth of just 2 percent in 2007, compared with net written premium growth of 14 percent back in 2002, perhaps indicating a moderation in the cycle.

Matthew Mosher, group vice president of Global P/C Ratings, A.M. Best Co, agreed there has been some market softening, particularly in auto, but he believed the industry was maintaining its pricing discipline.

“In 2006 the industry saw a level of profitability it had not seen in quite a long time, but we are still not seeing the level of rate cutting that would suggest undisciplined pricing,” said Mosher.

“There is also a much greater focus on risk in the industry than ever before, which will help minimize the impact of any rate softening,” he noted.

George Dale, commissioner, Mississippi Department of Insurance, cautioned that despite the industry’s collective record results in 2006, each line of business has to stand on its own by state. “We in Mississippi don’t want to be paying for forest fires that happen in southern California and neither do they want to be paying for hurricanes that hit Bay St Louis, Mississippi.”

Dale noted that in the five-year period from 2001 to 2005, property insurers in Mississippi took in $1.8 billion in premiums, but paid out $3.1 billion in claims. “Sure you had four good years, but that one instantly knocked them out. When I talk to the industry and try to get them to write in our state I ignore 05,” said Dale.

Panelists discussed the ongoing wind/water litigation issues relating to Hurricane Katrina, agreeing that a resolution on these issues would be beneficial to the industry in the long-term.

Dale noted that while negotiations are underway with some parties relating to a large number of impending lawsuits, as yet no agreement has been reached. “My concern is to be sure that the rights and settlements of the insureds are protected and that they don’t just get a coupon and the lawyers run off with all the money.”

From a ratings agency perspective, closure of the litigation would be beneficial to the industry overall, Mosher said. “It would reduce some of the uncertainty in the ratings aspect.”

Sullivan pointed out that there are two key issues at stake, one being the settlement of these claims and the second the settlement of the wind/water issue. “We need to know if wind-driven water is a covered event, whether it is a flood or whether it is wind. The definition of that is what needs to come out of this or else there is no future certainty,” he said.

Gelb cautioned that there would be a downside surprise to some insurers’ earnings if there is an extension of the policy language or some type of settlement that forces insurers to pay some of the flood-related losses.

“That being said, I think a fair amount of that is perhaps already baked in to expectations, so while a negative in the near-term, it doesn’t change the story in the long-term,” said Gelb.

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