P-C Insurers Boost Profits, But Concerns Loom Combined ratio at 97.9 for three quarters, but premium growth slows to 4.5 percent

Property-casualty insurers saw consolidated after-tax net income soar by 28.3 percent to $26.7 billion for the first nine months of 2004, a gain of nearly $6 billion from the same period the year before.

Further reflecting insurers improved financial position, the industrys surplus also rose by 6 percentsome $22 billionto $369 billion as of the end of September 2004, according to the third quarter report issued by the Insurance Services Office in Jersey City, N.J., and the Des Plaines, Ill.-based Property Casualty Insurers Association of America.

Indeed, the industrys surplus level at the end of first nine months of 2004 would have been a record high if not for the inflation factor. Surplus remained 5.2 percent below its inflation-adjusted high of $389.1 billion on June 30, 1998, ISO and PCI noted.

“Strong underwriting results drove increases in insurers net income and surplus, with insurers earning $2.8 billion in net gains on underwriting through nine months despite major hurricane losses,” observed John Kollar, ISO vice president for consulting and research.

The industrys bottom line also continued to shine, as the combined ratio improved for the first three quarters of last yeardown 2.4 points to 97.9 when compared to the same period in 2003. The combined ratio was the best nine-month figure in at least 19 years, according to ISO estimates.

A big part of the improvement can be traced to the fact that the industry posted an underwriting gain of $2.85 billion, compared with a $5.85 billion underwriting loss the year before. Mr. Kollar noted that prior to 2004, p-c insurers suffered net losses on underwriting during the first nine months of every year since at least 1986, when ISOs quarterly records began.

However, as good as these underwriting results were, they would have been much better if not for the four hurricanes in the third quarter, ISO emphasized. ISOs Property Claim Services unit estimates those storms caused $21.6 billion in insured losses.

Still, “despite one of the worst quarters ever for disasters,” noted Robert P. Hartwig, senior vice president and chief economist for the Insurance Information Institute in New York, the p-c industry in 2004 “appears poised to realize its first underwriting profit in more than a quarter century.”

This is because net losses from the four hurricanes to U.S. carriers are estimated to be between $10.3 billion and $12.3 billion, with the rest absorbed by foreign reinsurers, the Florida Hurricane Catastrophe Fund, and Floridas state-run Citizens Property Insurance Corp.

Increases in investment income and realized capital gains also contributed to the growth in insurers net income and surplus. Net investment income rose 3.9 percent to $28.7 billion through nine-months in 2004 while insurers realized $6.5 billion in capital gains on investments in the first three quarters, up 16 percent from $5.6 billion the year before.

One wrinkle in 2004s nine-month results, however, is the slowing growth in premiums. Property-casualty insurer written premiums rose by $13.8 billion to $321.2 billion in the first three quarters of 2004up from $307.5 billion during the same period the year before. However, the rate of net written premium growth slowed to 4.5 percent in the first nine months of 2004, down from the 9.7 percent growth rate in the same period of 2003.

“At 4.5 percent, written premium growth through nine months had dropped to its slowest pace since the 1.8 percent increase in nine-months 1999,” said Mr. Kollar. He noted premium growth had climbed steadily from that 1.8 percent figure in 1999 to a peak of 13.8 percent in the first nine-months of 2002 but has been slowing down ever since. He said improved profitability seems to have sparked increased competition that “threatens to undermine underwriting results going forward.”

“The fact of the matter is that pricing seems to be weakening more rapidly that anyone anticipated,” added Mr. Hartwig, warning that “the combination of rising inflation and slower premium growth could plunge the industry into a negative real-growth situation by mid-2005 for the first time since 1999.”


Reproduced from National Underwriter Edition, December 30, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.