Lehman/A.M. Best Co. 2nd Annual Conference

To break even economically, property/casualty companies would need to post a combined ratio of 110--still an underwriting loss, but profitable when investment returns are included. (Simpson said) Eric Simpson Senior Vice President A.M. Best Co.

A.M. Best Analyst Says Pain Persists for P/C Insurers

The pain phase will persist in 2001 for property/casualty insurers, said Eric M. Simpson, senior vice president, A.M. Best Co.

While A.M. Best is optimistic that pricing will continue to firm through 2002, companies are likely to still post widespread negative economic returns, Simpson said May 21 during the second annual Insurance Conference held in New York, cosponsored by Lehman Bros. and A.M. Best Co.

To break even economically, property/casualty companies would need to post a combined ratio of 110--still an underwriting loss, but profitable when investment returns are included, Simpson said. However, the industry is estimated to post a combined ratio of 110.3 in 2000 and 110.7 for 2001, Simpson said.

Some lines are struggling more than others. For instance, for personal auto insurers to reach a break-even economic return, they'll need a 106 combined ratio. The personal auto industry's combined ratio is estimated to be 108.7 for 2000 and 110 for 2002. Workers' compensation would need to break a 115 economic combined ratio, but it's estimated to post 117.5 in 2000 and 119 in 2001.

While A.M. Best examines insurers' balance sheets when setting rates, it also considers a company's ability to sustain its advantage and perform.

"Are you generating returns that exceed your cost of capital?" Simpson said.

He said the gap between the winners and the rest of the pack will continue to widen, noting three out of four insurers failed to achieve a return greater than Treasury bonds in 2000.

Consolidation also will continue to shrink the number of rated companies. Two years ago, A.M. Best estimated that one-third of the companies it rates would disappear as stand-alone companies within five years. That estimate is on track, Simpson said, as 7% of rated companies have vanished in each of the past two years.

In personal lines, Simpson said the top 10 largest companies, which control nearly 60% of the market, will grow to control 65% to 70% of the market in the next five years. State Farm, which currently leads the market with a 18.9% market share, will return to its glory days of having 24% to 25% of the market, Simpson said.

(By Meg Green, senior associate editor, BestWeek: meg.green@ambest.com)

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