Few US insurers in financial trouble, despite record cat losses

Despite record-breaking damage losses absorbed during consecutive hurricane seasons, U.S. property and casualty insurers are on track to record the lowest financial impairment and failure rates in a decade.
“Typically, major catastrophes trigger surges in property/casualty impairments, pushing already vulnerable companies into financial failure,” according to a special report issued by ratings agency A.M. Best. “Such was seen with both hurricanes Hugo and Andrew, which hit three years apart.
“Allowing for the possible exception of a couple of smaller insurers that still may show up among the financially impaired, history does not seem to be repeating this time, thanks to particular financial and underwriting strength seen recently in the industry.”
A.M. Best reports the combined ratio a core barometer of profitability, which historically has a high correlation with impairments improved by 2.1 points to 98.1 in 2004, giving the US property and casualty industry its first underwriting profit since 1978. “With the industry absorbing roughly $60 billion of new catastrophe losses in 2005, the year still may show an underwriting profit,” the A.M. Best report notes.
Coinciding with improved operating results, P & C insurers’ financial impairments have shown a sharp downtrend in 2003-05. The failure rate in 2004 fell to the lowest level since 1996.
If the current rate of 2005 impairments is annualized, according to A.M. Best, the 2005 impairment rate would finish even lower than in 2004. That would result in a tie for the lowest impairment rate since 1980.
“If 2005’s impairment rate annualizes normally, the prospective 0.35% impairment rate, or 1-in-286 companies, would be at slightly more than 4% of the historical norm,” says the A.M. Best report.
According to the ratings service, 57 US insurers 34 in 2003, 17 in 2004, and six in the first half of 2005 – were “too far under water, primarily from past inadequate pricing practices and reserve deficiencies, to ride the wave of recovery.”
But despite anticipated 2005 profits, signs of danger remain, A.M. Best warns. “These include a $59-billion industry loss reserve deficiency, courtesy of the prior soft market; signs of increasing price competition; and rising claims severity, particularly from asbestos and environmental liabilities factors that have the potential of putting upside pressure on impairments.”