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Executives foresee more rate reductions

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Insurance buyers will enjoy soft market conditions at least another year or more, according to a group of insurer executives surveyed by Munich Re America Corp.

Despite that outlook, many insurers are optimistic about their financial results and expect earnings to be the same--if not better--this year, the survey found.

Princeton, N.J.-based Munich Re America, a unit of German reinsurer Munich Reinsurance Co., conducted the survey among attendees of its 13th annual Roundtable Forum earlier this month. Forty-eight chief executive officers and senior executives of regional and middle-market national insurers participated.

The survey showed that the executives overwhelmingly believe the soft market is here to stay.

While 6% said it will last only through the end of this year, 94% predicted the soft market will continue through at least 2008. Of these, 38% said the soft market will last only through 2008, 30% said it will last through 2009, and 26% said it will persist beyond 2009.

When asked what they think are the major factors "enabling" the soft market, respondents ranked as No. 1 aggressive competition fueled by new capacity; weak resolve of senior management to achieve adequate returns came in a close second.

Strong recovery of financial markets, which may foster cash flow underwriting, was also reported as a leading factor contributing to the soft market.

Still, despite rate softening, most insurers--68%--indicated a financial outlook for the 2007-2008 period that is the same or better than the prior year period. That figure was a slight decrease from the 2006-2007 period, when 73% of executives surveyed predicted static or improved results.

"That was a pleasant surprise," said Dom Addesso, president of Munich Re America's direct treaty unit in Princeton. "We expected companies to be a little more pessimistic about their financial outlook," due to the soft market environment, Mr. Addesso said.

It was also surprising because companies are aware that 2006 was a "standout year" for earnings amid low levels of natural catastrophe activity, said Bill Fellows, marketing vp at Munich Re America.

The vast majority of insurers expect to report combined ratios of less than 100% for 2007-2008, the survey found.

At stock companies, 63% of company executives said they are targeting a combined ratio below 95%, and 37% are targeting a combined ratio in the range of 95% to 100%.

Mutual companies reported slightly higher target combined ratios for the 2007-2008 period. Only 14% of executives from mutuals reported a target combined ratio of 95% or less, while the bulk--79%--are aiming to fall in the 95%-100% range. Another 7% said they are targeting a ratio from 100% to 105%.

When asked about the most critical issues insurance companies face, maintaining underwriting discipline was ranked first, followed by managing cost structure, the cost and coverage of reinsurance programs, and managing their distribution or agency plant. "Developing strategy" made the list for the first time.

"Some of the traditional issues seem to be moving into the background," said Munich Re America's Mr. Addesso. "It's a recognition that the soft market is really just beginning in some respects...the more critical issues to maintaining revenues and profitability will be more strategic in nature."

To that end, 72% of respondents view that there will be an increased level of mergers and acquisitions taking place during 2007-2008, compared with 50% a year ago.

The survey results are available at Munich Re's Web site, www.munichreamerica.com.