Best study shows strength in P/C sector

Despite record hurricane losses in 2005, the U.S. property/casualty industry has remained financially strong over the past year, and rating upgrades outpaced downgrades for the first time since 2000, according to a special report by the nation's leading insurance industry rating organization.

However, Oldwick, N.J.-based A.M. Best Co. Inc. said it is concerned about the sustainability of the industry's financial strength in light of rising surplus levels, pricing deterioration and increased competition.

Between July 2005 and July 2006, Best upgraded the ratings of 39 companies while downgrading only 20, according to the report, "Underwriting Discipline Continues; Rating Upgrades Outpace Downgrades."

Rating upgrades, which accounted for 4% of all rating activity--up from 3% a year ago--outpaced rating downgrades for the first time in six years in all industry segments and for the first time in five years in the commercial lines segment, according to Best.

Most of the companies that received upgrades demonstrated the ability to internally generate capital through consistent operating results, Best found. Conversely, the downgrades were due to companies' poor operating performance and the subsequent drain on capitalization that caused deterioration of their financial strength, according to the report.

Best also found that industry surplus increased 2.7% during the first six months of 2006, following an approximate 7.8% increase from year-end 2004 through year-end 2005. Best attributed the surplus boost to favorable underwriting results, net investment income and unrealized gains were able to offset an increase in stockholder dividends.

"The industry is currently on track for a rare underwriting profit at year-end 2006," the Best special report noted. "Stronger underwriting fundamentals, a relatively light amount of catastrophe losses and favorable loss-reserve development were the driving forces behind the sold first-half 2006 results."

While Best said that the industry's financial prospects appear promising in the near term, it warned that companies that relax their underwriting standards could run into trouble.

"Well-positioned insurers that fully understand their risks, reserve properly, adhere to strong capital-management principles and have an inherently sound underwriting culture will continue to produce solid results in the current market cycle," the report stated.

"On the contrary, those companies that relax underwriting standards and have insufficient price-monitoring tools will be vulnerable to reduced financial strength and may find it difficult to survive through the current market cycle."

BestWeek subscribers can download a PDF copy of the report at no additional cost from www.bestweek.com. Nonsubscribers can download a copy of the report for $55, or a combination of the report and a spreadsheet file of the report data for $140, also at the Web site.

For further information, contact Best customer service at 908-439-2200, ext. 5742.