Canadian Underwriter

U.S. p&c combined ratio drops below 100%: Fitch

March 30, 2004   by Canadian Underwriter

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U.S. property and casualty insurers will post a combined ratio of 98.0% for 2003, 6.9% better than 2002, says Fitch Ratings. Return on equity was up to 11.6% last year from 6.5% the year prior.
The rating agency looked at 55 companies, with the overwhelming majority posting ratios below 100%. Premiums were up to US$217 billion, almost 20% growth, although Fitch notes the sample group’s premium growth may be higher than that of the industry overall, partly because it includes several of the new Bermuda-based insurers who have grown at a rapid pace in the past two years. For those companies exhibiting declines in earned premiums, this was largely the result of exiting lines of business or the spin-off of a subsidiary.
While investment income was up 5% year-on-year, the biggest contributor to a 108% jump in net income was improved underwriting performance. The loss ratio for 2003 was 71.9% (even taking into consideration all one-time reserve hits), a 6.5% improvement over 2002.
Nonetheless, Fitch says, issues remain for the industry. “Although this marks the second consecutive year of improvement, questions linger about the market’s ability to produce stable underwriting profits and adequate returns on capital.” Notably, some companies still show an increase in adverse reserve development, and Fitch says there is still an industry-wide reserve inadequacy, although its impact has been reduced by the hefty reserve additions taken in 2002 and 2003. If reserve charges were excluded, the group’s combined ratio would have been 91.9% last year.
The rater also questions the ability of the industry to maintain price discipline in the long run, although 2004 should see improved results. “While Fitch does not envision precipitous declines in insurance pricing in the near term, the recent moderation in pricing trends leads us to question whether rates will keep up with loss cost trends over the next few years, which creates uncertainty regarding profit projections for 2005 and beyond.”
Some companies are reporting net losses for 2003, including CNA, CNA Surety, Harleysville Group, Hartford, and PMA Capital, all having taken significant reserve changes last year.
The turnaround was even more significant for reinsurers, who posted a combined ratio of 95.1% last year compared to 118.7% in 2002. However, GE’s Employers Re, the largest reinsurer in the group, skewed overall results with its combined ratio dropping more than 50% between 2002 and 2003, down to 108.4%. Bermuda players such as IPC Holdings and Renaissance Re helped boost the sector, producing combined ratios of 34.9% and 56.4% respectively. Average ROE for reinsurers in the group was 17.1%, double that produced in 2002.
Overall, the rater is maintaining a negative outlook on the p&c commercial lines sector, as well as reinsurers, with downgrades continuing to outpace upgrades through 2004 although the pace of downgrades will slacken. The personal lines sector maintains a stable outlook.

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