Rating agency Fitch says U.S. p&c insurers can look forward to stronger returns in 2004, on the heels of price increases and tighter underwriting over the past two years. But those who have lagged behind this hard market trend may have lost the opportunity to play catch-up as price increases flatten in the coming year. Results for 2003, while strong, will be tempered by reserve charges in the “kitchen sink” fourth quarter, as well as cat losses from the fall hurricane and wildfire season. Reserves will continue to be a problem for the industry moving forward, specifically related to long-tail asbestos and environmental claims. Fitch sees little hope for tort reform to be successfully legislated in the near future. Fitch says 2003 will likely see a yearend industry income of $20.8 billion, on a combined ratio of 102%. But 2004 predictions are for net income of $31.7 billion with a combined ratio of 100.5%. This is based on a normal catastrophe year. Part of this improvement should come from strengthening investment returns linked to overall economic recovery, as well as continued increases in premiums written and earned. However, persistently low interest rates will continue to challenge insurers to make up ground on the underwriting side. The rater predicts the industry’s underwriting loss will drop significantly from the projected $10.6 billion in 2003, to $3.0 billion in 2004. But investment returns will likely be sufficient to stimulate a return to soft market pricing as early as 2005, Fitch says. However, this soft market turn may be more insidious, taking place in different lines at different times, unlike the broadbrush hard market turn experienced since 2001. Some players will not make it until the next soft market, the rater adds. Insolvency and the decision to exit specific lines or the U.S. market as a whole are likely to continue. This trend may not be a negative one in the final analysis. “These market exits remove underperforming capacity from the market and are likely to promote more favorable pricing for remaining competitors over the near term.” However, merger and acquisition activity should remain relatively flat, despite the recent consolidation of Travelers and St. Paul.