Sometimes, it seems commercial property/casualty insurers can't catch a break.

Despite months of rising property/casualty rates, the industry's full recovery from the soft market has been hindered by low investment yields and, in some cases, the need to boost reserves.

"Just when new business is on track, the investment shoe falls off," said Matthew Coyle, director at rating agency Standard & Poor's Corp. in New York.

John Ward, chairman of the Cincinnati-based Ward Group, said, "The irony of this is, in many years gone by, the underwriting results were not doing well but the investment results were carrying the day. And just the reverse of that is now occurring."

But analysts say that results should improve for insurers next year, though an extraordinarily low catastrophe year in 2002 may make year-to-year comparisons difficult.

For the nine months ended Sept. 30, the 15 commercial property/casualty insurers participating in the Business Insurance survey that report this data posted a 351.2% increase in net income, to $8.35 billion. However, 2001 results reflect the brunt of insurers' losses from the Sept. 11 terrorist attacks.

"If you're looking at 2002 results relative to a year like 2001, just about anything would look good," said Mr. Ward.

Other results from the BI survey of 17 major property/casualty insurers were:

c Due to hardening rates, net premiums written increased 17.8%, to $82.4 billion.

c Insurers' aggregate combined ratio improved to 102.6%, compared with 115.4% for the comparable period a year ago.

c Policyholder surplus for the 16 insurers that report this data increased 1.6%, to $53.09 billion.

`A mixed bag'

Results have been disappointing, said Michael Paisan, an analyst with Legg Mason Inc. in New York. Despite two years of rising rates, "we haven't seen anything filter down to the bottom line," Mr. Paisan said. "That's an indication of how undisciplined the market was for so long."

"It's kind of a mixed bag for the industry," said Michael Lewis, senior insurance analyst with Warburg Dillon Read in New York.

"Pricing remains very positive. The industry appears to be extremely disciplined in their underwriting approach, yet bottom-line results don't seem to be nearly as positive as top-line growth, and I guess the third quarter is a further indication of this phenomena," said Mr. Lewis.

"In the commercial lines, you're lucky if you hit the estimated results, and a number of companies fell short of targeted expectations," said Mr. Lewis. This stemmed, in part, from increases in asbestos reserves and growing claims for exposures that are a reflection of the current economic downturn, such as directors and officers liability, errors and omissions and surety, he said.

And "just to top everything off...I guess we still have some shortfalls developing on the investment front," Mr. Lewis said.

Chris Winans, a principal and senior equity analyst with The Williams Capital Group in New York, said: "The main thing that's hurting the ability of insurers right now to post positive surprises...is the extremely low interest rates. And nobody's expecting that situation to change any time soon." As long as the poor investment returns continue, "everything the insurers are doing now to improve their combined ratios has to be a little bit frustrating," he said.

Reserve questions

Reserves remain a problem for insurers.

For example, Chubb Corp.'s decision to boost its asbestos reserves in the third quarter by $625 million led to a loss of $242.1 million for that quarter.

"There's some optimism voiced about asbestos, but I didn't hear anybody saying the coast was clear on asbestos by a long stretch," said Mr. Winans.

S&P's Mr. Coyle said he would like to be able to say the outlook for the industry is stable, "but I don't think we're there yet on the commercial lines side. We've still got significant concerns about reserve adequacy for the entire sector, and that also includes asbestos."

But Mr. Coyle added that "we're starting to see more companies put up reserves for that issue, and we expect to see more of that in the fourth quarter as well. If we're looking just at the fundamentals of the business, things are moving along. These are the best conditions we've seen in a long time."

Improvements expected

Results should improve next year, observers say.

"We're on the rebound," said Mr. Ward. "Already, I see more good news on the horizon. I like the terrorism bill that just passed the Congress in terms of its impact on the industry. I like the discipline I see coming back into the underwriting, and it would be very reasonable to expect a turn in the investment results as well, so I think next year will be a very good year for the industry," he said.

Brian Meredith, senior property/ casualty insurance analyst with Banc of America Securities in New York, said there is the "possibility of seeing some upside earnings surprises in 2003." Mr. Meredith said he is optimistic because of the pricing outlook, particularly on casualty lines, and the industry's strong cash flow.

"I see more and more of a divergence of results by companies," said Mr. Lewis of Warburg Dillon Read. "Those financially strong, well-capitalized, superior underwriters who are capable of getting on top of their legacy issues should be able to benefit from the ongoing favorable pricing environment that has existed over the last few years and is continuing," he said. Those companies "should be able to produce distinctly better operating results that should flow into 2004 and even beyond."

"The fundamentals of the industry look like they continue to improve," said Stephan Petersen, vp at Cochran, Caronia & Co. in Chicago. "I still see more positives than negatives going into the market in 2003."

Mr. Petersen also pointed to some increased capital raising this year.

Chubb last week raised $525 million from an offering of common stock purchase warrants and debt securities (see story, page 39). This excludes a possible overallotment that may raise another $75 million. And The St. Paul Cos. Inc. in July raised $874.2 million.

There may an increased emphasis on raising capital next year. With premiums growing so quickly, insurers will seek to bolster their capital resources in order to retain their financial ratings, said Mr. Petersen. But that is "probably a good problem to have."