A.M. Best Finds Improved Earnings Boost P/C Industry’s Surplus Position

The capital surplus for U.S. property casualty insurers increased by 21.8 percent in 2003, fueled by “vastly improved operating earnings” and a big boost in unrealized capital gains, according to A. M. Best Co.

Best said the surplus is at record levels and continued operating improvements have led to profitable midterm results in 2004.

Best said it views the industry as “adequately capitalized for its current asset, credit and underwriting risks, although this adequacy will vary from company to company.”

The financial watchdog added, however, that despite this view, rating downgrades continue to outpace upgrades for the fourth consecutive year, as not every carrier capitalized on the recent hard market.

However, downgrade activity has subsided in 2004, as A.M. Best maintains stable outlooks on the reinsurance and personal lines sectors, while the commercial lines segment’s outlook remains negative.”

The surplus report notes that “not surprisingly,” as of year-end 2003, the industry experienced an increase in risk-adjusted capitalization when compared with the prior year. Moreover, nearly $44 billion of contributed capital during the years 2001-2003 has served various roles, from fuel for growth engines to life preservers, for insurers managing the challenges of the underwriting cycle.

Assuming the accuracy of Best’s findings, the report is evidence that the industry has finally taken some concrete steps to manage the cycle, which has plagued it for so long. Best said that “several years of price increases combined with more rigid underwriting standards are fundamental drivers of the industry’s improved operating performance and subsequent capital position.”

The increase comes after 2001, which Best called the industry’s “worst year ever,” with an underwriting loss of $53.9 billion. It said that since then the industry has demonstrated “a marked improvement” for the second consecutive year in 2003 underwriting results, as total industry underwriting losses were cut to just under $5 billion.

“The improved underwriting fundamentals are even more evident when taking into account the impact that the prolonged, suppressed interest-rate environment has had on fixed-income investments, which account for the majority of insurers’ investment portfolios. To complement the underwriting strides that the industry has made, total return measures were propelled in 2003 by the rising stock market,” according to the study.