[StBernard] Property insurers report solid gains for first half

[Westley Annis]

Property insurers report solid gains for first half 

OLDWICK, N.J. - The U.S. property/casualty industry recorded an underwriting
profit of $13.2 billion during the first six months of 2005, a substantial
gain from the record results posted during the comparable period of 2004
reports A.M. Best Co. 

Robust operating results drove the industry's surplus base to a new high,
despite unrealized capital losses, increased shareholder dividends and other
losses in surplus as insurers continued to reap the benefits of the hard
market. However, these results were driven largely by rate increases earning
through on policies that were written in prior periods. It is the current
pricing and policy term environment that will drive tomorrow's results, and
most indicators prior to Hurricane Katrina proved rate decreases and
competition on many lines of business had begun to emerge in earnest during
the first half of 2005. This trend will be decidedly reversed in the third
quarter on many lines of business, after Mother Nature presented a
not-so-gentle reminder that there is little room for complacency in this
industry, as threats continuously become reality. 

After insurers closed the statutory books on the first half of 2005,
Hurricane Katrina made landfall in Florida and went on to become a strong
Category 4 storm before making a second landfall on the Gulf Coast and
unleashing the floodwaters of Lake Ponchartrain on the New Orleans area.
While current estimates of insured losses vary widely, ranging from $25
billion to $60 billion, net income of $32.1 billion for the first half of
2005, combined with profits on noncatastrophe-impacted businesses during the
second half, will go a long way toward enabling the U.S. property/casualty
industry to absorb the largest insurance loss in history. 

The impact of Katrina and, to a lesser extent, Hurricane Rita, will be
reflected in third-quarter results and likely will deplete the annual
earnings of the industry; especially for carriers with homeowners,
automobile, commercial property, marine, energy and property reinsurance
exposures concentrated in Louisiana, Mississippi and Alabama. However, while
the effects of these storms likely will add several points to the loss
ratios of many carriers, the overall impact of the storms is not expected to
create widespread solvency issues. Rather, a few insurers that will not be
able to recapitalize their balance sheets to the level that supports their
ratings, or whose risk management capabilities have been called into
question, will suffer downgrades to their financial strength and credit
ratings. 

Despite the solid results posted for the first six months of 2005, A.M. Best
Co. is concerned with the reduction of year-over-year premium rate increases
that persisted for consecutive reporting periods since 2003 and gave way to
premium decreases across most lines of business and sizes of accounts in
2005. 

Through the first six months of 2005, the property/casualty industry
continued to build upon its capital base through strong operating results.
These results were driven by both a significant underwriting profit as
prior-year rate increases were earned throughout the period, and increased
investment income from a larger investment base as a result of favorable
operating cash flow. However, while the first half of the year had
relatively low catastrophe losses, the full year 2005 will end up being one
of the worst catastrophe years for the U.S. property/casualty industry,
driven by Hurricane Katrina losses. 

In addition, potential loss-reserve charges loom as the industry's estimated
reserve shortfall by A.M. Best on core reserves is $25 billion and $34
billion on A&E reserves. With companies historically reviewing reserve
adequacy in the second half of the year, A.M. Best believes loss-reserve
charges are imminent and will pressure margins. Nevertheless, despite the
ever-prevalent reserve charges and catastrophe losses, A.M. Best believes
that 2005 will be a profitable year for the consolidated property/casualty
industry, although a second consecutive year of underwriting profit may be
in question.