P-C Sector Sees Underwriting Profit, Higher Net In '04

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By Michael Ha

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NU Online News Service, April 12, 4:22 p.m.EDT?The U.S. property-casualty insurance sector,buttressed by its first annual underwriting profit in 26 years,recorded 29 percent higher net profit and a record surplus level in2004, according to the latest data from two industrygroups.[@@]

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Overall, the p-c sector had $38.7 billion in net profit lastyear, up from $30 billion in 2003. In nominal terms, last year'snet income is the highest-ever annual profit recorded for thesector. But adjusted for inflation, it's 10.6 percent below theall-time high in 1997, according to Insurance Services Office (ISO)and The Property Casualty Insurers Association of America (PCI),which provided the figures.

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Their figures showed a collective net underwriting gain of $5billion by the insurers, improving dramatically from their 2003performance when the companies suffered an underwriting net loss of$4.9 billion.

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This was the first time the U.S. p-c sector reported netunderwriting gain since 1978. The sector's combined ratio alsoimproved, falling to a profitable 98.1 percent last year, from100.1 percent in 2003.

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The insurers' underwriting profit last year came despite anunprecedented U.S. hurricane season and heavy catastropheclaims.

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"As good as insurers' results were in 2004, they would have beeneven better if not for the five hurricanes in the thirdquarter?Charley, Gaston, Frances, Ivan and Jeanne," said GregoryHeidrich, senior vice president for policy development and researchat Des Plaines, Ill.-based PCI.

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According to ISO, those storms and other catastrophes caused$27.5 billion in direct insured property losses in 2004?more thandouble the $12.9 billion in direct losses from catastrophes in2003. The Jersey City, N.J.-based ISO noted that if last year'scatastrophe losses had stayed at the 2003 level, the sector'scombined ratio would have improved to 97.3 percent.

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The insurers also saw improvements in other benchmarks in 2004.The sector's net investment income?mostly stock dividends andinterest on bonds?rose 2.4 percent to $39.6 billion last year, from$38.6 billion in 2003.

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Insurers also realized $9.3 billion in capital gains oninvestments in 2004, up from $6.6 billion in 2003. The sector'ssurplus, or statutory net worth, rose 13.4 percent to a record$393.5 billion at year-end 2004, the highest level ever in nominalterms as well as in an inflation-adjusted scale.

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But despite the sector's performance overall, ISO and PCI warnedthat now is not the time for insurers to celebrate. The biggestconcern the two groups expressed was the softening marketplacecondition which could hurt the sector's underwriting performance.ISO vice president for consulting and research John Kollar said:"Insurance is a cyclical business. Improved profitability and thegrowth in capacity as measured by surplus seem to have sparkedincreased competition that threatens to undermine underwritingresults going forward."

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Also reflecting developments in insurance markets, the 4.7percent written premium growth in 2004 was the slowest pace sincethe 1.9 percent increase in 1999, according to ISO. In total, thesector had $423.3 billion in written premiums in 2004, up from$404.4 billion in 2003.

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The two groups also reported that the sector's overall net lossand loss-adjustment expenses rose 3.8 percent to $299.5 billion in2004. Non-catastrophe loss and loss-adjustment expenses rose 2.7percent to $283.3 billion in 2004.

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ISO and PCI are not the only groups expressing concerns aboutinsurers' future prospects. This week, investment firm Cochran,Caronia Securities LLC issued a severe warning about the p-csector's prospects, which the firm sees as quickly deterioratingdespite the 2004 results.

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The Chicago-based firm predicted in its new report that U.S. p-cinsurers will see "dramatic declines in core earnings power"beginning as early as this summer and extending into 2006.

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From now on, the company predicted, the industry's pricingcycles will shorten to two-to-three years instead of the usualeight-year cycles. The firm pointed to reduced ability to usefinite reinsurance in the wake of current regulatory probes,heightened scrutiny by rating agencies and an emphasis ontransparency as factors that will quicken the shift from pricingpeak to trough.

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Cochran, Caronia Securities' director of investment researchAdam Klauber told National Underwriter that commercial andreinsurance sector earnings should be "materially belowexpectations" in 2006 and that insurers in general will show a"surprising overreliance on investment income."

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