Market Stability…?

Is there cause to believe that the North American property and casualty insurance marketplace has achieved stability? The latest insurance industry financial numbers from the U.S., produced by rating agency A.M. Best, suggests that insurers down south have “pulled the rabbit from the hat” similar to their Canadian cousins in terms of a rapid profit recovery over the course of the first six months of this year. The first half financial returns of U.S. reinsurers also point to a healthy market environment.

U.S. insurers boosted net profit for the first six months of 2004 by 52% year-on-year to US$23.6 billion, according to A.M. Best, with much of the gain achieved through better underwriting and firm pricing. Notably, U.S. insurers generated an underwriting profit of US$9 billion for the first two quarters of this year compared with a loss of US$2.7 billion reported for the same period in 2003 (see MarketWatch of this issue for further company result details). Improved underwriting saw the industry’s combined ratio drop below the magical “95% ratio”, which the various financial pundits have highlighted as being the necessary operating level in the current investment environment in order to deliver adequate shareholder returns. Canadian insurers also brought home a combined ratio of 92.2% for the second quarter of 2004, with both the Canadian and U.S. industries having bolstered available surplus significantly by reinvested profits made over the past 12 months or so.

Increased surplus means greater market capacity and financially stronger insurers. So, the current financial outlook of the North American p&c insurance industry appears “rosy”, offering the promise of a period of market stability. But, nagging fears persist that beneath the apparently calm surface of the industry linger turbulent waters. For instance, premium growth, and therefore price firming, appears to be stalling for Canadian and U.S. companies – with the reinsurance sector showing the first signs of weakness. And, fairly aggressive pricing activity by some insurers has already been reported by brokers and risk managers across Canada and the U.S., thus stirring concerns of yet another pending “soft market”.

Furthermore, a U.S. reserving report recently issued by A.M. Best suggests that the North American insurance industry remains under-reserved by US$67 billion (with asbestos and environmental liability exposures accounting for about 57% of this total) despite insurers having strengthened reserves by an estimated US$47 billion over the course of the last three years. The rating agency predicts that companies will continue to suffer from adverse reserve developments for some time to come.

And then there are those nasty and unexpected catastrophe hits. Up until mid-August, it seemed that U.S. insurers would enjoy an almost record low cat loss year, having only incurred about $3 billion in related losses. Then Hurricane Charley blew into the U.S south, followed in quick succession by hurricanes Frances, Ivan and most recently, Hurricane Jeanne. The total insured loss of the four hurricanes is likely to be at least US$22 billion, making this barrage of storms the second largest cost hit on insurers with only the devastation of the 9/11 terrorist attacks producing a higher tally, according to the U.S.-based Insurance Information Institute (III). Is the Canadian industry immune to such volatility? Far from it, Hurricane Juan stands testimony to this fact, plus the B.C. forest fires, and just this year insurers have been presented with a series of serious summer storm losses with a recent event in Alberta likely to leave companies particularly smarting.

And, as recent market developments testify, the “cost of the past” has not been shed by all players in the North American industry. Converium AG, regarded as being one of the newer and more “robust” global reinsurance players, announced a major restructuring of operations with the intent of selling off its U.S. operations. The company’s Canadian branch has already been placed in “run-off”. Allianz Canada, long rumored to having been on the selling-block due to operating cost pressures, appears to have found a new owner in ING. Although neither company could confirm the deal or the terms thereof at the time of going to press, broker sources fear that this latest move could signal the end of yet another desperately needed market. Brokers think it unlikely that ING will maintain the Allianz operation as a separate entity. Ranked 16 in size among p&c insurers, Allianz Canada produced net written premiums for the 2003 financial year of $651 million on a combined ratio of 103.4%.

Are more casualties of the last soft market likely to emerge as the North American p&c insurance industry moves forward? Most likely. Will there be any buyers in the event that adverse competition should once again undermine, or even threaten to undermine, shareholder returns? Probably not. In the meantime, the concept of long-term “market stability” appears at the moment to be almost as elusive as the promised quest of insurers to break the insurance cycle.