S&P Publishes P/C Insurer Report Card

Industry-wide price strengthening was a driving factor in the financial results of U.S. property/casualty insurance companies in 2003, according to an industry report card published by Standard & Poor’s Ratings Services.

Because of some easing of competitive pressures and the need to relieve capital constraints, this segment experienced improved operating performance for the year. However, Standard & Poor’s ratings actions in the sector since Oct. 29, 2003, have reflected a historical negative trend. During the past seven months, Standard & Poor’s has taken 12 rating actions on U.S. property/casualty companies or groups. Nine out of 12 actions were negative.

Personal Lines
A favorable rate environment and positive loss controls are having a positive impact on both the homeowner and automobile lines. According to the Insurance Services Office (ISO), the personal lines industry achieved a combined ratio of 97.7 percent for 2003, a major improvement from 104.5 percent in 2002. Standard & Poor’s sees continued improvement in pricing adequacy, though at a more modest pace. There is real potential that price strengthening for automobile insurance over the near term might not sustain 2003 increases. Competitive pressures are once again being felt. For homeowners lines, Standard & Poor’s has noted a decline in noncatastrophe losses in addition to reduced catastrophic claims. However, homeowner rates are expected to continue to rise, driven by rising construction costs and expensive natural disasters.

Commercial & Specialty Lines
Two distinct trends are driving the financial strength of the commercial lines sector: improved pricing on current business and the continued overhang of reserve inadequacy for legacy business, such as asbestos and workers’ compensation. Improved pricing is kicking in, helped by tighter terms and conditions, and that’s leading to significantly better operating results. Standard & Poor’s expects pricing to remain modestly ahead of claims inflation through 2004 and to boost operating performance into 2005. For 2003, ISO reported that commercial lines achieved a combined ratio of 101.2 percent, a considerable improvement from 109.8 percent for 2002. Nevertheless, there are a few hurdles before ratings improve, the largest being increases in reserves for future payouts.