"The real problem--and the beginning of the solution--will be the realization by the entire global market, including standard lines insurers, E&S carriers, Lloyd's and reinsurers, that for the most part they are actually operating at a loss."

The overall property-casualty industry combined ratio, he predicted, will soar to "a 'real' 2009 year-end outcome of 114," referring to a combined ratio without the noise of favorable loss reserve developments from prior years.

"This will drive legitimate capital to pull back, rethink and redeploy a reasonable prudent strategy," Mr. Johnson said.

"What is troublesome is that this very same fact will drive the weak companies into 'cash-flow underwriting' desperation to bring in premium to pay current claims. This will merely delay the inevitable downfall of these weak players, but may extend the soft market as they gasp one last dying breath."

Mr. Johnson said a number of factors "will continue to worsen results, or at least make the true results more clear." Factors he listed included:

o Generally accepted accounting principles that require carriers to recognize current market valuations of many investments and goodwill on acquisitions. (Goodwill generally refers to the value of intangible assets in an acquisition, typically accounted for initially as the amount paid for a target company over book value.)

"Just like the housing bubble, there was an acquisition bubble where top prices were paid out--just before the collapse."

"Major balance sheet write-downs will continue" as a result of accounting rules, Mr. Johnson said. "Ratings will be cut."

o Investment portfolio restructuring charges will continue.

o Currency exchange rates are having an impact.

Noting that the dollar is actually stronger globally, Mr. Johnson said this has a huge impact on Lloyd's and any carrier backed in pounds sterling (or any currency that has lost ground against the dollar). "When the pound was almost worth $2, ?1 billion meant you had $2 billion. Now you only have $1.4 billion, meaning that $600 million in available surplus evaporated," he said.

"One should study precisely--tracking back to the parent [company]--what the currency basis is for the surplus of a carrier," he advised.

o Standard carriers' life insurance portfolios may drive them to need to raise capital to shore up those obligations.

Weighing all these factors, Mr. Johnson predicted "there will likely be a sell-off of p-c companies in late 2009 and early 2010."

"It will get worse before it gets better," he said, referring to his observation about gasping insurers trying to hang on with last ditch efforts to compete. "It won't last long--maybe to the end of first-quarter 2010, but there will be some silly things [going on] for the remainder of this year."

Mr. Johnson also shared his own personal prediction about the nation's largest commercial carrier in 2008. American International Group will not exist by 2011, he said, speculating that a combined ratio over 100 through the first nine months of 2008 could only get worse in an environment of falling renewal prices.

Referring to a broader group of "sinking companies," he said, "Good talent jumps ship first...There will be many companies that already faced serious challenges but soon will have no talent to lead them out of their problems."

Struggling to deliver some upbeat messages after his dim forecasts on solvency and profitability, Mr. Johnson concluded that while the market "may seem to actually soften as weak players wrestle to come to grip with their plights,...common sense and shareholders' demands should put us clearly back on track by early 2010."

"The good news is that we don't need a natural disaster to get us to a hardening. We simply need to take an honest look at where we are. Long-term profitability can still be achieved in the p-c insurance world, but it requires smart, honest, energetic, confident individuals with a long-term objective, a little brilliance and a lot of common sense."

WHERE FIRST?

Focusing on timing and the specific segments that will harden, most NAPSLO members interviewed, including Robert Owens, president of RPS of Lexington, a unit of Risk Placement Services in Kentucky, and Laura Corwin, vice president of primary casualty for Liberty International Underwriters in Boston, pointed to directors and officers liability as the area where the prices will rise first, with losses emerging from the subprime/credit crisis and the Madoff scheme forcing carriers to react.

"D&O will be followed closely by a hardening of the commercial property market due to all the vacant property risks foreclosed on and the wind exposure impact from natural disasters of 2008," Ms. Corwin said. "Lastly, I anticipate that the excess casualty market should start hardening, as capacity is curtailed by buyers unwilling to place all their business with one source, enabling [insurance company] markets to increase premium by adjusting their rates to limits provided," she said.

Like Mr. Johnson, Ms. Corwin and Mr. Owens predicted that recognition of operating losses from last year will fuel a broader hardening.

"Once 2008 year-end results are published, some insurers may need to acknowledge the fact that their income isn't at the level necessary to cover all expenses," Ms. Corwin said. "Also, many companies' treaty reinsurers may back off of needed treaties, if the rate is inadequate for the exposures written."

"All lines, to some degree, should firm due to declining exposures and the need for companies to shore up underwriting profits. Catastrophes will be a major determining factor as well," Mr. Owens said.

"My opinions have been somewhat consistent since [the September 2008] NAPSLO [annual meeting], although I am surprised that anticipated changes in pricing have not yet hit the marketplace--at least not in our neck of the woods," he said.

David Price, executive vice president and chief underwriting officer of Burns & Wilcox in Farmington Hills, Mich., added trucking and all financial services E&O business to D&O and property-cat business in his forecasts of lines to harden first, but predicted that harder prices wouldn't be evident until the end of the third quarter.

"From our perspective, this outlook has definitely changed from the September NAPSLO meeting," said Alan Jay Kaufman, president and chief executive officer of Burns & Wilcox. "In September, we were not aware of the losses that were going to affect D&O and financial professional markets," he said.

Nathan Warde, president of Aspen Specialty in Atlanta, said that while there have been "some signs of market hardening" in 2009, "there really has not been a consistency that suggests a broad market hardening occurring soon."

"The property E&S market remains very focused on catastrophe exposures. With the [carrier] focus on preserving capital, some heavy catastrophe-exposed accounts are struggling to fill out some [coverage] layers. We are also seeing more retention by insureds, rather than an increase in pricing to attract additional support," he said.

In the casualty segment, Mr. Warde reported that there were some signs of renewed competition in January after a two-month pushback that had occurred in November and December last year.

"Originally, I thought the fundamentals, driven by the tight capital market and economic uncertainty, would lead to a harder market with property turning in first-quarter 2009, and casualty following two or three quarters later. But as we see less economic activity, and this translates into lower premiums for the market as a whole, I suspect we could see [continued] competition by many market participants in an effort to generate revenue," he said.

Scott H. Smith, president of S. H. Smith & Co. in Hartford, Conn., expects to see "reduced capacity in the market, an increase in pricing, as well as more restrictive terms and conditions on coverage for executive protection and management liability products by the end of the first quarter."

"The D&O and E&O markets should be the first to respond based on [the] premise that the recession and the slump in the financial markets have to work [their] way out sooner rather than later."

With the prospect of inflated awards and crime fueling increased losses for general liability insurers, third-party casualty should follow soon after D&O and E&O, Mr. Smith believes. "As carriers experience problems, and those with large net lines increase rates and those with heavy reliance for reinsurance have to increase rates, I believe casualty capacity as well as property capacity can be a problem," he said.

On the property front, he said, "We have already seen, in 2008 and early 2009, parts of the country get hit with storms that previously were not susceptible."

"I do believe that all segments of the property and casualty market should affect change by the fourth quarter of 2009," he concluded.

Asked if his opinion of the market had changed since the September 2008 NAPSLO annual meeting, Mr. Smith said it had intensified, but not changed.

"I did believe that...the market after 2001 was not completely hard. I did not believe that the soft market of 2007-2008 was completely soft, either," he said. "I did think there would be a correction in 2009 because the results were worsening and investors would expect better returns."

"The recession and the difficulties in the financial markets, as well as within the industry itself, should dictate a return of profitability sooner rather than later," Mr. Smith concluded.