2004 Surplus Gain Should Hit Double-Digits Hurricanes, tsunami losses offset by strong underwriting results, stock market surge

Despite Floridas barrage of hurricanes in the third quarter of 2004 and the catastrophic Asian tsunamis just before year-end, the U.S. property-casualty industry will probably post a surplus increase of 10 percent or more for the year.

This is the conclusion of TIARAs third-quarter 2004 survey of the 100 largest U.S. p-c insurers (ranked by invested assets).

TIARAthe Townsend Independent Actuarial Research Allianceattributes the industrys ability to offset its catastrophic losses to otherwise strong underwriting results and the fourth-quarter run-up in the stock market.

Through nine months, the 100-company composites surplus rose 6.8 percentlargely on operating income. In the fourth quarter, operating income should be positive as well, even after losses from the Asian tsunamis.

Additionally, there will be a year-end boost from the strong stock market (the S&P 500 was up more than 8 percent in the fourth quarter) so that full-year surplus growth is likely to reach 10 percent. This follows the eye-popping 2003 surplus increase of 23.8 percent for the composite, thanks to an even stronger stock market performance that year.

The accompanying table shows the composition of the increase in industry surplus for 2003, as well as for 2004s first nine months and projected full-year results.

Of course, the surplus gain is not shared equally among companies.

Through nine months, about half (47 percent) of the companies surveyed were trending toward double-digit surplus growth already, but 20 percent actually reported a decline in surplus.

Likewise, with respect to premiums, a solid 37 percent of the companies were trending above 10 percent premium growth, but 23 percent were heading for a decrease in premiums through nine months.

With composite annualized premium growth of 6.2 percent lagging the projected surplus growth of 10.0 percent, it would appear 2004 will be another year of declining premium leverage for the industry. TIARA estimates the composite premium-to-surplus ratio will finish the year at less than 0.9.

Of course, insurers couldnt know the stock market would boom in the fourth quarter and, as a whole, they did little to change their investment mix during the first nine months.

In fact, only 35 percent of the companies increased their relative holdings of stocks during this period, which hovered around 30 percent of total invested assets. (Bonds and short-term investments also held very steady in the mix, finishing with 56.1 percent and 7.9 percent, respectively). Bond quality remained very high, with investment-grade issues comprising nearly 97 percent of the bond portfolio.

The industrys ability to overcome the U.S. and Asian catastrophes in 2004 was based on solid day-to-day underwriting and another year of favorable stock market returns.

Over the past two years, the industrys surplus has increased by more than 35 percent and the ratio of premiums to surplus is now below 0.9-to-1, based on TIARAs 100-company composite. This type of cushion gives the industry ample margin for error but also tends to contribute to a soft market.

Fred Townsend is the president of the Townsend Independent Actuarial Research Alliance. He can be reached at ftownsend@snet.net.

Reproduced from National Underwriter Edition, February 25, 2005. Copyright 2005 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.

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2004 Surplus Gain Should Hit Double-Digits

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