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Fourth-quarter results presented some evidence of price softening but nothing to dampen speculation that when the industry is set to report overall profits this month underwriting will be in the black.

But it also turns out the credit crunch had its impact on the property/casualty industry with several carriers reporting billion-dollar losses or more.

The loss stemmed from nearly $15 billion in charges related to the credit market including an $11.12 billion pretax write-down related to a super senior credit default portfolio.

Just to what extent these losses represent a threat to the general prospect of underwriting profitability remains difficult to pin down.

AIG Chairman Martin Sullivan says in an accompanying statement that the "rapid deterioration in the U.S. residential real estate and credit markets significantly affected several of our operations and investments."

The following month the situation seemed to worsen when Morgan Stanley says in a research note that the credit default swap losses that AIG estimated at $900 million could reach $13 billion if the fixed income crisis deepens.

But at least AIG's troubles paled in comparison with the fate of the investment bank Bear Stearns, whose expertise was investing in real estate. In mid-March, teetering on bankruptcy, the venerable Wall Street brokerage was sold to JP Morgan Chase for $2 a share. A year ago, Bear Stearns stock was trading at $171 a share.

The picture also seems grim for a line of insurers specializing in municipal bonds with names such as Ambac and MBIA.

Those normally sleepy businesses reported fourth quarter billion-dollar losses with their entry into the arena of insuring those complex securities Wall Street created to package subprime losses.

These companies are now scrambling to protect their triple-A status in the aftermath of such losses since such a loss would impact the cost of borrowing for thousands of governmental entities throughout the country.

Standard & Poor's director John Iten says such financial product losses don't go to the heart of underwriting profits and that the losses and don't present any stumbling block to combined ratios coming in below the century mark in the coming years on a regular basis.

He says the real threat to the underwriting side of the business comes from directors and officers and errors and omissions coverage in which claims have already been filed, but it is too soon to tell what the ultimate impact will be here.

Meanwhile, insurance industry chiefs presented a picture of softening prices in the fourth quarter that are the real threat to continued underwriting profitability.

Chubb CEO John Finnegan says rates fell by anywhere from five to 10 percent but that terms and conditions held solid.

Selective Insurance Group Chief Financial Officer Dale Thatcher says the company has imposed a 4 percent workforce reduction in the aftermath of future expected premium declines in order to maintain profitability.

Hartford chief Ramani Ayer says while he sees some price softening he does not see the market losing all rationality and thereby predicts some premium growth in the coming year.

The first quarter of this year does not look much better from a premium growth standpoint.

MarketScout reported last month that rates fell 14 percent in February with reductions strongest in the service contractor group field. But reductions moderated for oil and gas contractors.

In addition, reductions for workers' compensation coverage declined in the aftermath of legislative overhauls of state workers' comp programs.

April 15, 2008

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