Aggressive price cutting will not help property/casualty insurers, A.M. Best study says.

OLDWICK, N.J.--(BUSINESS WIRE)--Jan. 6, 1997--Property/casualty insurance companies cannot afford to rely on old ways of thinking in the increasingly competitive industry environment, A.M. Best Co. says in a new report. Cutting prices to gain market share, the rating agency warns, is a short-sighted and ultimately counterproductive approach.

"Executives at many primary companies are ignoring valuable lessons of the past," the company says in its study, Choosing to Survive or Thrive in a New Era, which appears in the January property/casualty edition of Best's Review. "They continue to believe that market share gained in the short run through extensive price cutting far outweighs the consequences of reducing underwriting standards, underpricing business risks and compromising their balance sheets."

These practices, the company warns, will "short-circuit their prospects for long-term viability."

Some property/casualty insurers are making the "tough decisions" that are necessary to generate strong results and sustain A.M. Best's highest ratings. For many, these decisions include mergers, acquisitions, strategic partnerships and restructurings, focused largely on shedding product lines that are considered not to be part of the companies' core businesses.

In most sectors, however, operating returns have remained "lackluster to poor," and many insurers are differentiating themselves through lower prices. The industry's poor business fundamentals are beginning to manifest themselves in deteriorating accident-year trends, as a growing number of companies are sacrificing premium rates to preserve market share. A.M. Best believes these actions will become much more evident in the industry's 1997 reported results.

A.M. Best forecasts that the property/casualty industry will generate a combined ratio of 107 in 1996, including 3.0 points of catastrophe losses and 2.4 points of asbestos and environmental (A&E) strengthening. In 1996, moderating A&E losses will be more than offset by deteriorating accident-year price adequacy. A.M. Best expects this trend to result in further deterioration in underwriting performance in 1997, projecting a 108.8 reported combined ratio for the year. The rating agency cites fierce competition and declining rates, questions of distribution effectiveness, vulnerability to catastrophe exposures and reserve deficiencies, and mass tort liabilities as factors that ensure the industry's continued underperformance.

Meanwhile, the industry is entering an extended shakeout, evidenced by heavier consolidation activity. Mergers and acquisitions increased sharply in 1995 and continued to climb in 1996. Almost 40% of the major M&A activity in 1996 was related to the reinsurance segment. Market globalization has fueled the recent wave of consolidation among domestic reinsurers. Among primary companies, recent M&A activity reflects efforts to focus on areas of corporate strength, acquire additional expertise or reduce costs to improve returns.

A.M. Best believes this trend is "just beginning to take off." Specialty lines, such as medical malpractice and nonstandard auto, are likely to lead the way, as they require specific servicing and underwriting expertise that can be obtained by acquiring companies or blocks of business. While short-term dislocations are likely, A.M. Best believes consolidation ultimately will lead to a more efficient and market-focused industry.

A.M. Best Company, established in 1899, is America's oldest and most widely recognized insurance rating and information source.

CONTACT: A.M. Best Company, Oldwick

JEFFREY DUNSAVAGE

[phone], ext. 5618