Mr. Fong also forecast that earnings outlook is going to improve for the “next several years.”

“That's almost a given. That won't be a surprise to anyone,” he noted. “With the premium rate increases we have seen in the last couple of years [working] their way through the income statements, they are likely to translate into better earnings. It's just the mechanics of the business.”

And there were some very good underwriting results, particularly for bellwethers in personal lines like the Progressive Corporation and the Allstate Corporation, noted Matthew Coyle, director at Standard & Poor's Ratings Services in New York. “They continued to generate strong underwriting results. In general, results were good,” he said. “And in commercial lines, we are continuing to see favorable trends in that sector's pricing. Pricing continues to be robust, and we are considering 2003 to be another year where companies can rebuild their balance sheets.”

The earnings snapshot of the 29 insurers tracked by NU also illustrates a continuing improvement in insurers' income statements. For instance, more than half of the companies tracked at least doubled their net income in the past quarter compared to their year-ago periods, with eight companies more than tripling their profit levels.

Most of these insurers in the snapshot also showed a marked increase in their quarterly operating earnings, with the combined year-over-year improvement coming in at around 30 percent. Furthermore, net realized gains for these companies jumped roughly 250 percent in the past second quarter, with most insurers posting net investment gains. This stands in contrast to one year ago when the majority recorded net realized losses.

The result from ACE Ltd. represented the typical pattern of upswing reported by many companies. The Bermuda-based insurer posted $371 million for its second-quarter profit–more than tripling the net income of $104 million posted one year ago–thanks to higher premium rates and investment gains.

XL Capital, another Bermuda-based insurer, also posted improved figures, with a much better combined ratio. The company reported $347.7 million for its second-quarter profit, in contrast to a loss of $91.7 million posted one year ago. Net premiums earned from its general operations were $1.5 billion–a jump of more than 40 percent compared with the 2002 second quarter. In this years second quarter, XLs combined ratio was 92.2.

“All in all, second-quarter results look pretty good except for a few companies,” commented James Auden, an analyst at Fitch Ratings in New York. “If you are looking at underwriting results, a large number of companies produced under-100 combined ratios,” Mr. Auden noted. “For some, they probably need to get even further below 100 to produce an adequate return on their capital, but they are moving in the right direction.”

Mr. Auden also added that pricing is still trending favorably in casualty lines and is stabilizing in commercial property lines. “In homeowners, rates are still going up, and I think there are definitely still some casualty lines that are not at the level of rate adequacy. Rates need to continue to go up for those lines. Examples would be medical malpractice, professional liability and workers compensation in a number of states,” he said.

William Wilt, an equity research analyst at Morgan Stanley in New York, also commented that growth of net written premiums at most companies was strong and in line with the consensus estimates in the second quarter. “It was a combination of unit growth as well as rate changes. I think there was also the fact that in some markets, you had some companies pulling back–because they were capital-constrained or constrained by ratings agencies–and that created growth opportunities for other companies,” Mr. Wilt observed.

Another positive news item from the quarter was that, overall, the homeowners line of business held up fairly well despite catastrophe losses in the second quarter being higher than usual, he added. On the other hand, he observed the auto frequency that several companies reported is on the rise after a long period of steady decline.

Mr. Wilt also noted that most insurers saw “very favorable” book-value growth in the second quarter, thanks to the combination of generally good earnings coupled with the benefit of declining interest rates from the early part of this year, which boosted market values of their fixed-income portfolios.

“But it should also be pointed out that much of that boost in fixed-income portfolios has now been reversed with recent interest rate movements,” Mr. Wilt said. “The expectation now is that much of that has been lost since the close of the second quarter, over the course of July and early August, because of the rapid increase in interest rates.”

Also, there were notable disappointments in the second quarter, he added. Among the generally upbeat earnings results, Mr. Wilt noted, were reserve actions by some insurers in what could turn out to be a preview for other potential reserve-deficiency announcements possibly later this year.

“One notable issue in the past quarter was that a number of companies took reserve charges. Several companies increased their provisions for bad-debt expense–in other words, for reinsurance recoverables,” he said.

Also commenting on reserve actions, Mr. Auden from Fitch Ratings added: “We are concerned that there are companies that may take reserve actions in the second half that could lead to some deterioration in results for the rest of the year.”

Mr. Auden also observed that, looking at last year's fourth quarter, “a large amount of deficiency that was recognized for the calendar year came late in the year. That's what usually happens,” he said. And we still think that for the industry on the whole, there are still some reserve deficiencies out there.”

Mr. Coyle from S&P also agreed, adding that the reserve issue is the “one big wildcard” in the industry.

Generally, Mr. Coyle said, companies strengthen their reserves during the fourth quarter of the year, “and it's still too early to say how that will pan out, but we have publicly said the industry still has some reserve deficiencies it will have to contend with.” He forecast there would likely be some “realization of that in the second half of this year.”

“We wouldn't be surprised by more reserve strengthening during the rest of the year. But we would expect the magnitude of these announcements to be less than what they were in previous years,” he added.

“The only thing that remains an issue is the capital. Capital is still constrained for the industry, and a lot of it has to do with adverse developments in equity markets in the past few years, as well as reserve strengthening, which really depleted capital positions over the last couple of years.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 1, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.