A.M. Best Reports: Financial Strength of U.K. Nonlife Insurers Remains Significantly Below Historic Levels.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Sept. 15, 2003

Despite seemingly attractive pricing in most lines of business, the financial strength of U.K. nonlife insurers overall remains significantly below historic levels. This reflects the twin effects of adverse loss development and asset losses eroding balance-sheet strength, according to A.M. Best's special report, "U.K. Domestic Nonlife Market Report."

Most U.K. insurers rated by A.M. Best remain in the secure range, but average financial strength rating levels have been reduced over recent years.

While the current hard market is helping restore strength to a degree, institutional investors in stock insurers are now very focused on the risk adjusted return on their investment. This leads to a natural limit to the amount of capital they are prepared to see an insurer carry, and, hence, a limit to insurer balance-sheet strength. Accordingly, while rated insurers often stress a goal of achieving A+ or even A++ ratings, A.M. Best believes that investor appetite for providing the equity levels necessary to support this is limited.

Concern about adverse development on prior year liability lines also is constraining the provision of fresh equity capital. This concern appears very valid when U.K. prior year loss development is analyzed. The period 1998 to 2001 shows severe adverse development in U.K. liability with gross paid and incurred loss ratios worsening by up to 30% from the originally reserved level. Rates increased substantially in 2002, on top of significant hardening in 2001. But reserving levels for both 2001 and 2002 still look low versus historic experience. Further worsening seems likely. In addition, loss-cost inflation continues.

Substantial rate hardening in liability lines has continued in 2003, although this may be flattening through the summer renewals. To the extent liability prices turn, this seems most likely in less complex areas where the major insurers are more able to use model-based pricing. Employer's liability, the worst performing U.K. line through the soft market, is expected to stay very firm.

Liability lines represent a modest 11% of "domestic" premiums--excluding reinsurance, marine and aviation classes--in the United Kingdom. However, liability has not been the only source of underwriting losses in recent years. Motor--32% of domestic gross written premium--also performed very poorly in the period to 2000. It is a concern, therefore, that motor rates now appear to be softening again.

Conversely, U.K. property results--31% of domestic gross premiums written--were good throughout recent years, despite flood losses.

The underwriting losses of the late 1990s were supported by the long bull market in equities, with unrealised capital gains in insurer balance sheets peaking in 1998. Not surprisingly, by the end of 2000 this unrealised capital gain position had been eroded, as equity markets turned and realised gains were taken to support underwriting losses. By the end of 2002, unrealised losses had become a substantial source of pressure on the U.K. domestic industry capital base.

BestWeek subscribers can download a free printed copy of the full 6-page special report, "UK Domestic Nonlife Market Report," or a combination of the printed report plus a spreadsheet file of the report data for $75 from our Web site, www.bestweek.com.

Nonsubscribers can download a printed copy of the full 6-page special report for $50 or a combination of the printed report plus a spreadsheet file of the report data for $125 from our Web site, www.bestweek.com. Call customer service for more information, [phone], ext. 5742.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.