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While risk managers enjoy soft pricing, the continuing soft market means commercial property/ casualty insurers are struggling to make a profit and will likely accelerate industry consolidation.
"The consolidation trend is alive and well and 'If you can't grow it, you might as well buy it,' seems to be the motto of the day," said Michael Lewis, senior insurance analyst with Dillon Read & Co. Inc. in New York.
While first-quarter 1997 results were helped by low catastrophe losses and are an improvement over the first three months of 1996, insurers cannot count on that continuing, and the year ahead could be tough.
"Stuff happens," said Ron Frank, an analyst with Smith Barney Shearson in New York. "Catastrophes occur. . . .It's a long year and, in particular, the wind season is still ahead of us."
Meanwhile, commercial buyers will continue to have a soft market.
"We see a continuation of the same competitive market conditions that persisted for at least the last year," said Louis G. Paglia, senior vp and treasurer at TIG Holdings Group in New York.
"You can't bank on weather to bail you out, and with the competitive environment only intensifying and no sign of any let-up in sight, I just think that it's going to be tougher and tougher to generate reasonable returns, especially for the commodity-type players," said Mr. Lewis.
"Rates aren't adequate and they're becoming less and less adequate, it seems, with every passing month," he said.
In general, "I think the trend is for fairly sluggish earnings trends for commercial insurance companies," said Weston M. Hicks, an analyst with Sanford Bernstein & Co. in New York.
Smith Barney's Mr. Frank said he expects "some upward pressure" on loss ratios.
Mr. Frank also sees the continuation of what he describes as the "pattern of haves and have-nots in terms of the stronger companies being able to hold up a little better under the pressure and some others starting to show some cracks."
"In many ways, the results are going to be just an ongoing war of attrition," he said.
"Just about everybody we've talked to is budgeting a higher loss ratio as the year goes on," said David Seifer, vp with Donaldson Lufkin & Jenrette Securities Corp. in New York.
"Every one of our industry sources believes that industry conditions today are at the lowest level that they've been either since 1982-1983 or, in some instances, their entire careers," said Mr. Seifer.
Cash claims are growing faster than premiums, said Michael Smith, an analyst with Salomon Bros. in New York. "It's very difficult to envision any significant underwriting improvement from the current levels, given where pricing is," he said.
"The fundamentals are unchanged, and top-line growth is hard to find," said Barbara Stewart of Stewart Economics in Atlanta. "I think it's going to be very hard for companies to squeeze out any kind of improvement in earnings," she said.
If the deterioration continues as expected, not only is it assured results will be poor in 1997, but 1998's will be "equally weak, if not worse," said Eric Simpson, senior vp at A.M. Best Co. in Oldwick, N.J.
With the relative good fortune on the catastrophe front in the first quarter, Hamilton, Ohio-based Ohio Casualty Corp.'s results offer an example of how insurers benefited. Ohio Casualty reported $5.3 million in catastrophe losses for the first quarter, compared with $17.4 million for the comparable period a year ago.
The lower catastrophe losses, along with higher capital gains, helped boost its first-quarter net more than 820% to $32.7 million.
Overall, the 21 insurers surveyed by Business Insurance that report this data posted a 21.9% gain in net income to $3 billion.
Among other first-quarter results reported:
Net premiums written for the 24 insurers surveyed increased 9.6% to $24.34 billion. This compares with a 9.9% increase for year-end 1996 (BI, March 24).
Travelers Property Casualty Corp.'s net premiums written rose by more than 120% to $2.11 billion, reflecting Travelers' acquisition of Aetna Life & Casualty Co.'s P/C business.
Investment income increased 13.9% to $3.76 billion. This compares with an 11.7% increase in all of 1996.
With fewer catastrophe losses this year vs. the comparable period a year ago, underwriting losses narrowed by 44% to $726.9 million. In 1996, underwriting losses widened by 57.4%.
Insurers' combined ratio improved to 102.2% vs. 105.7% for the comparable period a year ago. This compares with a 106.1% combined ratio for all of 1996.
Excluding Royal & SunAlliance USA Inc., which did not report its first-quarter 1996 policyholder surplus, surplus for the 19 insurers reporting this data for both years improved 19.7% to $43.46 billion.
"I think you saw, really, more of what you would expect to see in this environment, which is among the property/casualty insurers and reinsurers, increasing pressures on top-line growth in a more competitive environment," Smith Barney's Mr. Frank said.
Catastrophes were even lower than expected, he noted. "I think we all expected them to be light, but in some cases they ended up being virtually non-existent. It did boost the quarter results in some cases. Otherwise, I'd say the most remarkable thing about the quarter was probably how unremarkable it was," said Mr. Frank.
Gloria Vogel, senior vp at New York-based Advest Inc., agreed there were "no real shockers." There were no exceptional additions to reserves, and investment income was up because interest rates were higher, she said.
Except for the bright spot of a mild winter, "it was probably a mediocre to slightly below-average quarter," according to John L. Ward, of the Cincinnati-based Ward Financial Group.
Consolidation may be the force that shakes up the market.
"I see some acceleration of merger and acquisition activity among marginal commercial insurance companies in '97," with larger insurers there to "pick up the pieces," said Peter Wade, an analyst with Lehman Bros. in New York.
The soft market "has been with us for such a long period of time it's now at the point where it's really driving consolidation, because a number of companies have started to really feel the pinch of this long, soft cycle," agreed Mr. Ward.
"Probably it's going to occur more with the larger companies that we've already seen, like an Aetna or a Travelers, because the larger companies have the mind-set and the resources to do it," Ms. Stewart said of consolidation.
"Some of the smaller companies are not in the same kind of competitive bind as the larger ones are," she said. "They have established pretty strong positions regionally or in specialities and may not need to join forces with anyone else and, in fact, many of the smaller organizations have been living off the troubles of the large ones for quite a while.
"Most people, when they talk about consolidation, tend to say the big ones are going to acquire the little ones, and I don't think that's necessarily the case," she said.