Property-casualty insurers as a whole will report 12 percent growth in their 2005 bottom line to $43.5 billion despite the biggest catastrophe losses in the market's history, a group of industry organizations revealed last week.
Preliminary 2005 results provided by the Property Casualty Insurers Association of America and the Insurance Services Office Inc. also indicate the industry will post a modest underwriting loss, compared with the previous year–when the first underwriting gain was reported in 24 years.
But even with that underwriting loss, the industry increased its net income by $5 billion compared with the $38.5 billion gained in 2004.
Insurers achieved these results despite catastrophe losses totaling a record $57.7 billion before reinsurance recoveries, the groups noted.
"U.S. insurers entered 2005 well capitalized and well prepared for major catastrophic losses, having implemented effective risk management strategies which helped insurers better manage losses and control costs," said Robert Hartwig, chief economist for the Insurance Information Institute, which said full-year results should be released later this month.
Another plus for the bottom line is that insurer investments benefited from higher interest rates and a resurgent economy in 2005, he added.
"That being said, the $43.5 billion earned by property-casualty insurers in 2005 translates into a 10.1 percent return on surplus or net worth–well below the 14.9 percent return on equity earned by the Fortune 500 group of companies," Mr. Hartwig pointed out.
Gregory Heidrich, senior vice president of policy development and research for PCI, cautioned that last year's catastrophe losses have had a significant effect on reinsurers and reinsurance markets that is likely to be felt by primary insurers. Catastrophe coverage in regions prone to natural disasters such as hurricanes and earthquakes will be most impacted, he noted.
"One major broker reported last month that at least five Bermuda reinsurers had either stopped underwriting or reoriented their business since Hurricane Katrina," according to Mr. Heidrich.
So, despite the sizable increase in profits, challenges remain, the groups warned.
"While the U.S. property-casualty industry's overall results for 2005 contain a number of positives, those countrywide numbers mask significant problems in specific markets and locations," said Michael R. Murray, ISO's assistant vice president for financial analysis.
As an example, Mr. Murray cited the $24.7 billion in insured losses on residential and commercial property in Louisiana incurred in 2005.
Although that figure was before reinsurance recoveries and excluded losses covered by the residual market, it was still $3 billion more than all the premiums insurers charged for property insurance in the state from 1982 to 2004, he noted.
Looking ahead, the p-c industry should report strong underlying profit margins for the first quarter of 2006, a leading analyst predicted last week.
Bank of America p-c analyst Brian Meredith said that with moderate first-quarter catastrophe losses, the biggest risk in the quarter is adverse development of 2005 hurricane losses–particularly Wilma, which took place in the fourth quarter.
Chubb, Hartford and St. Paul Travelers are most likely to have some development, as well as some reinsurers, he noted.
Commercial lines profit margins should be excellent for the first quarter, with most companies expected to report combined ratios below 90. "Competition in the casualty markets and non-wind-exposed property business continues to escalate," Mr. Meredith wrote in a report last week.
Premium growth for most reinsurers will be flat to down in the quarter as companies seek to reduce exposures and price increases remain focused in the wind-exposed and earthquake catastrophe reinsurance. "Ceding companies are also retaining more risk," Mr. Meredith said.
However, profitability demonstrated in excellent combined ratios should result from the fact that first-quarter catastrophes most likely failed to trigger most coverages, he added in his report.
Regarding personal lines, top-line pressure in both auto and homeowners insurance should prevail in the first quarter, while growth in policies-in-force should continue to decline, according to Mr. Meredith. "However, earnings and book-value growth should be strong due to good underlying margins," he wrote.
Insurance brokers should continue to display mixed results, with organic revenue growth stable to modestly improving, while wage inflation and pricing pressure continues to hamper margins, he added.
AIG and Chubb are among the companies most likely to surprise analysts on the upside, Mr. Meredith predicted.
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