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An Extended Upswing for Insurers


By Catherine Seifert Aided by improved underwriting and investment results, Standard & Poor's Equity Research expects that the overall property-casualty insurance industry will return to profitability in 2003, following net losses in 2002 and 2001. And we think the industry enters 2004 on relatively solid footing. Growth in policy premiums, typically the primary source of revenues for property-casualty insurers, remains healthy as the industry continues to enjoy favorable pricing power.

Although we anticipate that the rate of increase in written premiums may slow for certain commercial and personal property lines of coverage, we expect that premium pricing for commercial casualty lines of coverage will remain strong well into 2004, based on anecdotal evidence.

PREMIUM PICKUP For the entire industry, we estimate that written premiums rose just over 12% in 2003, for an estimated annual premium volume of $415 billion. Loss costs were fairly well contained. In addition, the stock market rebound buoyed the industry's returns on investments, insurers' other primary source of revenues.

In 2004, we project written premiums will advance another 12%, to $465 billion. Our favorable outlook for premium growth is partly offset by our more cautious stance regarding the industry's loss-reserve position heading into the year. Although many companies such as Travelers (TAP.B), American International Group (AIG), and Hartford Financial Services (HIG) announced a series of high-profile, one-time reserve boosts to account for adverse developments in asbestos, environmental, and certain casualty claims, we still view the industry's reserve position with a degree of wariness. We're encouraged by the actions of these industry leaders, however, and anticipate that others will follow suit in 2004.

And based on another key property-casualty measure, surplus, which also is referred to as capital or net worth (the amount by which an insurer's assets exceed its liabilities), things appear to be looking up for the industry. Surplus is often referred to as "policyholder surplus" under statutory accounting principles and is analogous to shareholders' equity under generally accepted accounting principles.

GREATER LEVERAGE. The combination of strong underwriting results and a turnaround in both realized and unrealized investment results helped to propel industry surplus to nearly $312.5 billion at June 30, 2003 (based on the latest aggregate industry operating data from the Insurance Services Office, an industry association), a 10.8% increase from $282 billion a year earlier, and a 9.9% rise from a yearend 2002 surplus of $284.3 billion. The gain in surplus in the first half of 2003 also marked the first material increase in industrywide capital levels since 1998.

As written premiums rose at an even faster pace than surplus, the industry's leverage -- the extent to which an insurer uses its surplus to write new business -- increased in the 12 months ended June 30, 2003. The ratio of net written premiums to surplus is a useful way to quantify this practice. The ratio of net written premiums to policyholder surplus for the 12 months ended June 30, 2003 was 1.25, a slight rise from the 1.22 figure for the 12 months ended June 30, 2002.

Regulators typically allow insurers to leverage their surplus two times, or write $2 worth of premiums for every $1 of surplus. Using the 2-to-1 premium-to-surplus ratio as our guide, we can roughly estimate that the industry had approximately $117.5 billion of excess surplus or capital at June 30, 2003. Although this scenario is helpful in illustrating the industry's financial position, it needs to be considered against a backdrop of a number of other issues.

IN GOOD HANDS? First, although property-casualty insurers might be permitted to leverage their surplus to this extent, few actually do (although we have seen anecdotal evidence that more companies are taking advantage of favorable market conditions and ratcheting up their leverage). Second, considering the rather skimpy levels of reserves for asbestos and environmental and certain casualty claims, this so-called excess surplus could evaporate if reserve levels were bolstered.

S&P's top stock selection in the group is Allstate (ALL), ranked 5 STARS (buy). We recently raised our 2004 operating earnings per share estimate for Allstate by 10 cents, to $4.20, to reflect the underlying improvement in its core personal lines underwriting results, coupled with contributions from the savings and investment division. (Hartford, categorized as a multiline insurer, is also ranked 5 STARS.)

Of the other companies mentioned, Travelers carries a 3-STARS (hold) recommendation, while AIG, also classified as a multiline insurer, is ranked 4 STARS (accumulate). Analyst Seifert follows stocks of property-casualty insurers for Standard & Poors Equity Research


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