Despite a slew of catastrophe losses, property-casualty insurers last year posted their first underwriting profit in 26 years, totaling $5 billion, according to a study by the Insurance Services Office (ISO) released today.

Jersey City-based ISO said those results came in the face of slowing premium growth, and that insurers' net income after taxes and overall profitability rose for the third consecutive year as surplus climbed to a record high.

The information was contained in the company's Insurance Issues Series study Insurer Financial Results: 2004.

ISO said insurers' net income after taxes rose to $38.7 billion in 2004, from $30 billion in 2003.

The company found that insurers rate of return on average net worth (based on Generally Accepted Accounting Principles) climbed to 9.4 percent last year, from 8.9 percent.

Surplus jumped to $393.5 billion from $347 billion.

Improvement in underwriting results, ISO said, drove the $8.7 billion increase in net income, with the $5 billion net gain on underwriting in 2004 constituting a $9.9 billion positive swing from the $4.9 billion net loss on underwriting in 2003.

The study said that underwriting results for 2004 reflect a firming in insurance markets that began in mid-1999 and gathered momentum through mid-2002.

However, "premium growth slowed in 2004 as a result of conditions in insurance markets, raising serious questions about underwriting profitability going forward," said Carole J. Banfield, ISO executive vice president - Information Services.

She added that "with today's investment yields, underwriting results must be better than they used to be for insurers to achieve any given overall rate of return."

Insurers' GAAP rate of return last exceeded 15 percent in 1987, when it was 17.3 percent even though the combined ratio==a key measure of losses and other underwriting expenses per dollar of premium==was 104.6 percent then.

Achieving a 17.3 percent rate of return with investment results, tax rates and financial leverage like those in 2004 would require that the combined ratio improve to about 88 percent==roughly 17 percentage points better than the combined ratio for 1987, and about 10 percentage points better than the 98.1 percent combined ratio recorded for 2004, ISO said.

Ms. Banfield commented that, "The other reason insurers didn't celebrate their results for 2004 with champagne and fireworks is that, even though their rate of return rose to itshighest level since 1997, it remained low compared with long-terms norms and the rates of return earned by firms in other industries."

ISO found that insurers' 9.4 percent rate of return for 2004 was 0.5 percentage points less than their average rate of return from 1971 to 2003. And the median GAAP rate of return for the Fortune 500 in 2004 was 14.9 percent==5.5 percentage points more than the GAAP rate of return for the insurance industry and 4.8 percentage points more than the 10.1 percent rate of return for large insurers.

Other points mentioned in the study:

o The combined ratio improved 2 percentage points to 98.1 percent in 2004 from 100.1 percent in 2003.

o At 98.1 percent, the combined ratio improved to its best level since 1978, when it was 97.4 percent.

o Underwriting results improved even though written premium growth slowed to 4.7 percent from 9.4 percent in 2003 and 14.3 percent in 2002.

oAs premium growth slowed, growth in net loss and loss adjustment expenses accelerated, climbing to 3.8 percent in 2004 from 1.8 percent in 2003.

o Contributing to the growth in loss and loss adjustment expenses, catastrophe losses more than doubled to $27.5 billion in 2004 from $12.9 billion in 2003.

o Net income in 2004 benefited not just from improvement in underwriting results, but also from the fact that net investment income rose $900 million last year to $39.6 billion. Realized capital gains on investments climbed $2.7 billion to $9.3 billion.

The 78-page study also provides analyses of results by line of insurance and reinsurers' results. The study also reports on trends in surplus, financial leverage, operating cash flows, insurer insolvencies, mergerand acquisition activity, industry concentration and performance of insurance stocks.

ISO provides members and customers with products and services that help measure, manage and reduce risk.

Special Reports /

Insurers 04 Profit $5 Billion Says ISO

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