Analysts Fear Erosion In P-C Pricing After first underwriting profit since 1978, picture could change in a hurry
The U.S. property-casualty insurance sector, buttressed by its first annual underwriting profit in 26 years, recorded a 29 percent gain in net income and a record surplus level in 2004, according to consolidated industry data provided by two industry groups.
The big question, however, is whether the party is already over for p-c insurers, with premium growth slowing considerably.
Overall, the p-c sector had $38.7 billion in net profits last year, up from $30 billion in 2003. In nominal terms, last year's net income is the highest-ever recorded for the sectorbut adjusted for inflation, it's 10.6 percent below the all-time high in 1997, according to the Insurance Services Office and the Property Casualty Insurers Association of America.
The most impressive achievement, however, is the collective net underwriting profit of over $5 billiona dramatic improvement from their 2003 performance, when the industry suffered an underwriting net loss of nearly $4.9 billion.
This was the first time the U.S. p-c sector reported a net underwriting gain since 1978. The sector's combined ratio improved accordingly, falling to 98.1 last year, down from 100.1 in 2003.
Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York, referred to the sector's 2004 results as an "uncharacteristically respectable financial performance," given its history of underwriting losses.
He noted that 2004 was literally the first time most p-c industry participants working today had ever witnessed an industrywide annual underwriting profit. "Unfortunately," he lamented, achieving an underwriting profit has been a "once-in-a-career event for most people."
The p-c underwriting profit last year was all the more impressive considering the unprecedented U.S. hurricane season and heavy catastrophe claims. "As good as insurers' results were in 2004, they would have been even better if not for the five hurricanes in the third quarterCharley, Gaston, Frances, Ivan and Jeanne," said Gregory Heidrich, senior vice president for policy development and research at Des Plaines, Ill.-based PCI.
Those storms and other catastrophes caused $27.5 billion in direct insured property losses in 2004more than double the $12.9 billion in direct losses from catastrophes in 2003, according to the Jersey City-based ISO, which noted that if last year's catastrophe losses had stayed at 2003s level, the sector's combined ratio would have fallen as low as 97.3.
The sector's net investment incomemostly stock dividends and interest on bondsrose 2.4 percent to $39.6 billion last year. Insurers also realized $9.3 billion in capital gains in 2004, up 41 percent from $6.6 billion in 2003. The sector's surplus, or statutory net worth, rose 13.4 percent to a record $393.5 billion at year-end 2004the highest level ever in nominal terms as well as on an inflation-adjusted scale.
However, ISO and PCI warned that now is not the time for insurers to kick back and celebrate. The biggest concern the two groups noted was the softening market, which could hurt underwriting performance.
"Improved profitability and the growth in capacity as measured by surplus seem to have sparked increased competition that threatens to undermine underwriting results going forward," said John Kollar, vice president for consulting and research at ISO.
Indeed, the sectors 4.7 percent written premium growth in 2004 was the slowest pace since the 1.9 percent increase in 1999, according to ISO. In total, the sector had $423.3 billion in written premiums in 2004, up from $404.4 billion the year before.
ISO and PCI are not the only groups expressing concern. Mr. Hartwig cautioned that 2004 and 2005 will probably represent the "zenith for p-c insurers" in the current cycle.
Also last week, investment firm Cochran, Caronia Securities LLC issued a severe warning about the p-c sector's prospects, which the firm sees as quickly deteriorating despite the sterling performance in 2004. The firm predicted that U.S. p-c insurers will see "dramatic declines in core earnings power" beginning as early as this summer and extending into 2006.
The Chicago-based firm forecast that from now on, pricing cycles will shorten to two-to-three years instead of the usual eight years. The firm pointed to reduced ability to use finite reinsurance in the wake of current regulatory probes, heightened scrutiny by rating agencies, and an emphasis on transparency as factors that will quicken the shift from pricing peak to trough.
Adam Klauber, director of investment research at Cochran, Caronia Securities, told National Underwriter that commercial and reinsurance sector earnings should be "materially below expectations" in 2006, while insurers in general will show a "surprising overreliance on investment income."
ISO and PCI reported that the sector's overall net loss and loss-adjustment expenses rose 3.8 percent to $299.5 billion in 2004. Non-catastrophe loss and loss-adjustment expenses rose 2.7 percent to $283.3 billion.
Reproduced from National Underwriter Edition, April 15, 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.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.