Despite a 20.8 percent increase in first-quarter underwriting profits fueled by lower catastrophe losses, the property-casualty insurance industry saw its bottom-line income drop 3.8 percent due to declines in investment income, higher federal income taxes and the impact of several "special developments" that complicated a direct comparison of the two periods.
The quarterly report on joint industry results issued by the Insurance Services Office and the Property Casualty Insurers Association of America showed that underwriting gains were up $1.4 billion to $8.4 billion for the first quarter of this year, while the combined ratio fell a full point to 91.2.
Industry surplus rose 3 percent, from $427.1 billion on Dec. 31, 2005 to $440.1 billion as of March 31 of this year.
ISO said these were the best industry results since 1986. That took some of the sting out of the fact that despite higher underwriting profits, industry net income fell $700 million to $16.7 billion–at least before a trio of "special developments" were factored in (recapped later on in this story).
Still, the next quarterly recap might not be as positive, noted PCI's senior vice president, Gregory Heidrich. He warned in a statement that with catastrophe losses for the first six months of the year amounting to $4.5 billion–$1.4 billion more than last year for the same period–first-half results will likely look a little less stellar.
In addition, "we have to brace ourselves for more bad news on catastrophe losses as the year plays out," said ISO's assistant vice president for financial analysis, Michael R. Murray.
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 level of underwriting profitability it would put them on par with the Fortune 500 group of companies with an average 15 percent return on equity.
However, expected losses from an active hurricane season will likely keep that from happening, he added.
The first-quarter results do provide proof of the industry's resilience in the face of last year's extraordinary losses, according to Mr. Hartwig, who noted 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 first-quarter combined ratio, but Mother Nature put a stop to that, he said, with major catastrophes such as Hurricane Katrina leaving the industry with a combined ratio of 100.9 by year's end.
The softening market could further reduce net written premium growth–which slowed to 1.9 percent in the first quarter versus 2.4 percent a year earlier–while interest rate hikes might dampen insurer investment returns, which fell 14.9 percent to $11.7 billion in first-quarter 2006, Mr. Hartwig added.
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.
Meanwhile, a slowing economy, he noted, could reduce growth in home, auto, commercial property and workers' comp lines as consumer spending and business activity declines.
Arun Raha, senior economist at Swiss Re, which gave its own analysis of the industry yesterday, said in an e-mail that "first-quarter industry results are an improvement on last year–that is good news." The reinsurer added that "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."
ISO and PCI noted that "reported figures for first-quarter 2006 and first-quarter 2005 reflect three special developments that affected how results for the periods compare," involving three insurance carriers that the groups declined to identify.
In first-quarter 2006, the groups said, "one large insurer stopped reporting financial results as a property-casualty insurer and instead began reporting financial results as a health insurer."
The groups added that "another insurer changed the accounting for $0.7 billion paid to its foreign parent in 2005, reducing both first-quarter 2006 reported new funds paid in and first-quarter 2006 dividends to shareholders by that amount."
In addition, the groups noted that "in first-quarter 2005, one insurer received $2.3 billion in nonrecurring special dividends from an investment subsidiary, inflating industry investment income for the period."
The groups explained that adjusted for these special developments:
o Industry first-quarter 2006 net income after taxes increased $1.7 billion, or 11.4 percent.
o Net gains on underwriting increased $1.5 billion, or 22.1 percent.
o Surplus increased $15.9 billion, or 3.8 percent.
o Written premiums "increased 2.5 percent in first-quarter 2006–0.6 percentage points more than they rose based on reported results, but less than half of the 5.1 percent average annual rate of increase in premiums during the 10 years ending in 2005."
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