A.M. Best Special Report: P/C's Low Impairment Trend Likely To Have Hit Bottom of Trough in 2007

Business Wire, May 19, 2008

OLDWICK, N.J. -- The property/casualty industry recorded its lowest impairment count and the lowest impairment frequency rate in at least 38 years in 2007. Four property/casualty (P/C) companies, two affiliated, became impaired, for an impairment rate of 0.12%--or one in 833 companies. The industry's impairment rate has been lower than average or declining since 2001, driven by the industry's improving profitability and capitalization over the period, but the trend may have hit the bottom of the trough. Due to deteriorating economic and financial market environments and increasing competition, impairments are likely to rise.

* Although very few P/C companies became impaired in 2007, thousands of policyholders were affected. Even before the impairments occurred, policyholders likely experienced problems with claims payments or coverage as their carrier's financial condition deteriorated.

* As impairment nears, an accelerating rate of degradation in a company's Best's Rating generally occurs. Overall, the higher the rating, the lower is the risk of impairment. Impairment frequencies are higher for the total industry than for companies with a Best's Rating. The impaired companies in this report for 2007 were not rated by A.M. Best at the time of their impairment.

* The top two causes--deficient loss reserves/inadequate pricing and rapid growth--have accounted for more than one-half of all insolvencies since 1969. Deficient loss reserves as a cause of impairment typically escalated during or shortly after the soft markets.

* Over the period covered by this study, peaks in the industry's impairment rate often were driven by the combined effects of negative operating environments and high catastrophe losses. Most often, the triggers for increased impairments are sudden, major events that push already vulnerable companies beyond the brink.

* Catastrophe risks and other factors unique to a local market (e.g., business segments, political infrastructure) appear to be greater influences on the distribution of impairment frequency than a domicile's regulatory budget. California and Florida are among the top states in terms of size of regulatory budget, and both had higher than average impairment frequencies.

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Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.