A.M. Best Says P/C Industry’s Combined Ratio Under 100 Despite High Cat Losses, Reserve Development

The property/casualty industry’s combined ratio improved about 2.6 points to 99.7 for the first quarter in 2003, the industry’s strongest first-quarter underwriting performance in the most recent five-year period, according to a special report released by A.M. Best Co.

The results include a marked increase in adverse loss-reserve development attributed to asbestos and environmental liabilities and catastrophe losses, which collectively added nearly 4.8 points to the reported combined ratio, according to the special report, “P/C Industry Reports Combined Ratio Below 100.”

The industry’s combined ratio improvement – a key measure of underwriting profitability – was driven by a 1.9-point decline in the loss and loss-adjustment-expense ratio, and a 0.7-point decline in the expense-plus-policyholder-dividend ratio. As increased premiums, especially on an earned basis – driven primarily by premium rate increases – offset dollar increases in loss and underwriting expenses.

The improved underwriting performance was reported despite a considerable increase in catastrophe activity, attributed primarily to severe winter storms and windstorms, which added 1.5 points to the combined ratio.

The 2003 first-quarter results were abnormally impacted by reserve charges, as Hartford Insurance Group, after announcing the completion of its ground-up asbestos reserve study, strengthened asbestos reserves by $2.6 billion on a pretax, net basis. Hartford’s charge and ordinary asbestos-and-environmental incurred losses added an estimated 3.3 points to the industry’s first-quarter combined ratio, compared with 0.7 points in the first quarter of 2002.

Nevertheless, the industry recorded favorable reserve development on core reserves, negating the overall impact of Hartford’s extraordinary charge. A.M. Best expects carriers will take additional reserve charges during 2003 against A.M. Best’s estimated prior-year non-A&E reserve deficiency of more than $40 billion, and more carriers will strengthen asbestos reserves.

While A.M. Best acknowledges the positive impact the compound effects of accelerating pricing increases over the past few years and improved underwriting fundamentals are having on results, history indicates that the sustainability of these first-quarter results throughout the year is improbable.

Given the magnitude of inadequate soft-market pricing in the mid-to-late 1990s and the large reserve deficiencies yet to be realized, operating returns will remain constrained, even though they will likely improve and surplus is expected to grow. While average price increases are expected to be double-digit throughout 2003, the velocity of rate increases has decelerated during the first quarter, which is a sobering indication for property/casualty insurers, as the peak of the hard market cycle might have been reached and the industry is just starting to see the cycle’s impact reach the bottom line.