Property and Casualty Insurers See Profits Slip

Although there are various theories about how to stabilize this market, true reform will require a collaborative effort with the industry, regulators, community growth planners, and the building industry. Florida's unilateral attack on the insurance industry in the past year will not result in a long-term solution.

Interestingly, on Feb. 22, the National Oceanic and Atmospheric Administration's (NOAA) National Hurricane Center released a study indicating that increasing economic damages suffered by hurricanes over time has not been caused by an increase in the number or severity of storms but rather by the increased wealth along the coastline.

The study estimated that if the 1926 Great Miami Hurricane were to hit today, it would cause losses of $140 billion to $157 billion, potentially almost double the $81 billion caused by Hurricane Katrina.

Q: You mentioned earlier that the industry is relying increasingly on investment income. Isn't this dangerous since the stock market has been declining?

A:Yes and no. Common stock makes up about 25% of all industry invested assets. Bonds make up about 60% which are primarily comprised of Treasuries and AAA corporate bonds which have been performing well. Going forward, we will watch for any shifts toward lower-rated bonds providing higher yields and thus more risk.

Q: In addition to investment quality, what do you look for when rating a company?

A: We look to see if a company has enough capital to support the risk level it has taken on in its portfolio. For example, a company that holds all government-guaranteed bonds (with no default risk) is required to hold less capital than a company that holds a sizable portion of junk bonds or common stock.

Likewise, we also look to see that the company holds enough capital to support its lines of business and premium growth. Consistency in profitability is also key to the stability of the business and the growth in capital.

Finally, liquidity, relationship to affiliates and their financial strength, and overall trends in asset, premium, and capital growth are a measure of operational stability.

The current financial strength ratings for all property/casualty insurers as well as life and health insurers can be found at the Ratings Screener.