The insurance industry saw a gain in first-quarter underwriting profits of 20.8 percent, but future catastrophe losses will likely mean it cannot maintain that growth rate throughout 2006, according to an industry report today.
Jersey City, N.J.-based Insurance Services Office and the Property Casualty Insurers Association of America said insurers' underwriting profit rose $1.4 billion from $6.9 billion to $8.4 billion for the first quarter of this year, with a combined ratio of 91.2 percent compared with 2005′s 92.2 percent.
ISO said these were the best industry results since 1986.
Despite the underwriting profit, net income fell $700 million, or 3.8 percent, to $16.7 billion as investment income declined and federal income taxes increased, ISO said.
In a statement, Gregory Heidrich, PCI's senior vice president, said that with catastrophe losses for the first half of the year amounting to $4.5 billion–$1.4 billion more than last year for this period–the first half of the year's results will not benefit from the first-quarter decline in catastrophe losses.
"We have to brace ourselves for more bad news on catastrophe losses as the year plays out," said Michael R. Murray, ISO assistant vice president for financial analysis.
Further eroding profitability is competition among insurers that can soften premium increases and a drop in investment income. Net investment income declined from $15.2 billion to $13.64 billion in 2006.
Industry surplus rose from $427.1 billion on Dec. 31, 2005 to $440.1 billion as of March 31.
Robert P. Hartwig, senior vice president and chief economist for the Insurance Information Institute in New York, in his analysis of the results, said if insurers could maintain this profitability it would put them on par with the Fortune 500 group of companies with an average 15 percent return on equity. But, expected losses from an active hurricane season will likely keep that from happening.
The first-quarter results do provide proof of the industry's resilience in the face of last year's extraordinary losses, he said, noting there were only two years where the industry recorded an underwriting profit in 28 years–1978 and 2004. The industry was on track for another profitable year in 2005, with a 92.2 percent combined ratio, but Mother Nature put a stop to that, noted Mr. Hartwig, leaving the industry with a combined ratio of 100.9 percent.
The continued softening market reducing premium rates, and interest rate hikes could dampen insurers' investment returns, Mr. Hartwig said.
He said the industry faces challenges from inflation that could increase claim severity in key lines such as workers' compensation and auto insurance, and aggravate reserve adequacy in long-tail casualty lines. This could also burn through reinsurance layers, Mr. Hartwig advised.
A slow economy, he noted, could reduce growth in home, auto, commercial property and workers' comp lines as spending slows.
Arun Raha, senior economist at Swiss Re, which gave its own analysis of the industry yesterday, said in an e-mail: "First-quarter industry results are an improvement on last year–that is good news. We expect worse than average cat losses this year, but probably a lot better than last year. This will encourage continued underwriting discipline, as will the modest investment results expected for this year."
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