PC Net Hits Record $23.5 Billion: ISO

By Matt Brady

NU Online News Service, Oct. 18, 4:26 p.m.EDT?Improved underwriting and investment results helpeddrive property-casualty insurers' net after-tax income to a recordhigh of $23.5 billion in the first half of 2004, two insuranceorganizations reported.[@@]

As a reflection of the industry's growth, the Insurance ServicesOffice in Jersey City, N.J., and the Property Casualty InsurersAssociation of America in Des Plaines, Ill., said the industry'ssurplus, or statutory net worth, rose 6.8 percent to $370.4 billionas of the end of the first half, from $347 billion at the same timein 2003.

The industry's income over the first half of 2004, they said, isthe most of any six-month period, both before and after adjustingfor inflation, since the ISO began keeping quarterly records in1986. The surplus for the first half of 2004 would also have set anew record, but after adjusting for inflation it remains 4.7percent below the peak levels of June 30, 1998.

"Strong underwriting results drove the increases in net incomeand surplus, with insurers earning $9 billion in net gains onunderwriting in first-half 2004. Prior to 2004, insurers sufferednet losses on underwriting during the first half of every yearsince at least 1986, when our quarterly records begin," said JohnKollar, ISO vice president for consulting and research.

"The combined ratio," Mr. Kollar added, "improved 5.4 percentagepoints to 94.4 percent in first-half 2004 from 99.8 percent infirst-half 2003."

The combined ratio for the first half of 2004, Mr. Kollar added,was the best in at least 19 years and almost two percentage pointsbetter than the best full-year combined ratio since the ISO begankeeping annual records in 1959.

Roger Kenney, assistant vice president of research for PCI, saidthat investment income also played an important factor in theindustry's increased profits.

"Increases in investment income and realized capital gains alsocontributed to the growth in insurers' net income and surplus," hesaid. "Net investment income?primarily dividends from stocks andinterest on bonds?grew 4.1 percent to $19 billion in six-months2004 from $18.3 billion in six-months 2003. And insurers realized$5 billion in capital gains on investments in first-half 2004, upfrom $4.5 billion in first-half 2003."

However, Mr. Kenney noted that the insurance industry is acyclical one, and there are already indications that increasedcompetition is softening the market.

"The Council of Insurance Agents and Brokers second-quarter 2004rate survey indicates commercial insurance prices fell an averageof 3.2 percent for all sizes of accounts," he said.

"Other indicators pointing to softening in insurance marketsinclude the spread between written premium growth and GDP growth.That spread has turned negative, with premium growth in the firsthalf of 2004 falling 2.4 percentage points short of the 6.9 percentincrease in GDP versus year-ago levels," he said.

The industry's profitability also rests on several otherfactors, Mr. Kenny noted.

"Catastrophe losses are another wildcard that threaten toundermine underwriting results going forward," he said, adding thatthe ISO's property claims unit has already reported $17.2 billionin direct losses from hurricanes during the third quarter.