U.S. industry shows bottom-line improvement, but risks remain: A.M. Best

Although the hard market pricing seen since late 2000 is now being reflected in U.S. p&c insurer results, questions about future exposure, specifically to environmental risks, remain, says rating agency A.M. Best.Commenting on first-half 2003 results, the rater says net income is up 159%, to US$18.6 billion, from the US$7.2 billion reported for first-half 2002.Rate increases drove net written premiums up 12.6% year-on-year, and the industry’s combined ratio dropped below the “magic 100%”, to 99.3% for first-half 2003. And this is despite the effect of adverse development from asbestos and environmental (A&E) exposures, which add about 5.1 points to the ratio. “This is the first time in the past five years that the industry reported a combined ratio below 100 at midyear,” A.M. Best notes.Underwriting losses dropped to US$2.1 billion for the first half of 2003, against US$10.2 billion at the same point last year. “Market dynamics such as withdrawals in certain business lines, combined with limited capacity, especially in some primary and excess casualty markets, are maintaining pricing momentum. However, the volatility of rate increases tempered, and it is apparent that property rates largely have reached the peak of the pricing cycle.”One sore spot investment returns also seems to be turning around. The U.S. industry saw investment income rise 7% to US$20.7 billion for first-half 2003, from US$19.4 billion at the same point last year. This helped push operating income up by 118.6% year-on-year, and the overall effect was a “much-needed” boost to surplus of 11% for first-half 2003.Despite these impressive results, A.M. Best takes a cautious view of the industry, noting, “the industry still is toiling its way out of a decade of soft pricing, accelerating loss-cost trends and a multiple-year capital-market quandary.”Nonetheless, the rater predicts yearend 2003 will see U.S. insurers post positive results and surplus gains for the first time in three years, despite the negative pull of A&E reserve charges and adverse development, specifically in commercial lines.