Property-casualty insurers had an underwriting gain of $31.2 billion, contributing to a bottom-line net income result of $63.7 billion, a 44 percent increase over $44.2 billion in 2005, Insurance Services Office reported.
The U.S. p-c industry's 2006 underwriting result–a combined ratio of 92.4–is remarkable even against other recent years, and according to Jersey City, N.J.-based ISO, it is attributable to more than just a lower level of catastrophes.
In 2005, the industry posted a net underwriting loss of $5.6 billion, with $33.6 billion in catastrophe losses hitting the results of private U.S. insurers, according to ISO reported with the Des Plaines, Ill.-based Property Casualty Insurers Association of America (PCI).
The comparable cat loss total for last year at $11.7 billion was only one-third of the 2005 total, according to Michael R. Murray, ISO assistant vice president for financial analysis, who said residual market insurer losses, Florida Hurricane Catastrophe Fund losses and foreign insurer losses were excluded from the cat figures.
In an interview, Mr. Murray pointed out that 2006 has been somewhat mischaracterized as a low-cat year, describing it instead as an average year for catastrophe losses.
He also noted that other factors contributed to the stellar underwriting result. These included declining auto frequency trends, loss reserve releases totaling about $6 billion, federal class action reforms and tort reforms at state levels.
On top of all that, "the fruits of the prior hard market were being harvested," he said, suggesting that favorable trends all converged in a "Goldilocks fashion" in 2006, making everything "just right" for insurers last year.
"More often than not in the insurance industry, everything breaks wrong. Once in a while, we catch a break," he said.
Indeed, the 92.4 combined ratio bested the 2004 combined ratio of 98.4, the last time the industry recorded an underwriting profit, according to records retained by National Underwriter. It also came in better than 2003′s 100.1 ratio, which had a lower level of catastrophe losses than 2004, and lower than 1997, which at 102 was the only other low-cat year anywhere close to 2007 in the decade.
Mr. Murray reported that the result was the best since at least 1959, when ISO's records begin. But insurers "abhor making a profit," he said, citing evidence of pricing trends that suggest underwriting gains are already being eaten into by competitive pressures.
Over the long term, insurers have not been profitable, the ISO/PCI report said.
"Cumulatively, even including last year's record gain on underwriting, insurers suffered net losses on underwriting totaling $135.3 billion during the ten years ending 2006 and $434.3 billion since 1959," Mr. Murray wrote in the ISO report.
Genio Staranczak, PCI's chief economist, added that declines in investment yields have eaten into insurers' ability to use investment income to support underwriting operations. "The average yield on insurers' cash and invested assets dropped from 7.3 percent during the decade ending 1986 to 6.5 percent during the decade ending 1996 and 4.8 percent during the decade ending 2006," he said.
"This means that individual insurers must now achieve better underwriting results than they did in the past just to achieve the same level of overall profitability," he said.
In 2006, the industry's net investment income–primarily dividends from stocks and interest on bonds–grew 5.2 percent to $52.3 billion from $49.7 billion in 2005. But realized capital gains on investments (not included in net investment income) tumbled 65.4 percent to $3.4 billion in 2006 from $9.7 billion the year before.
Combining net investment income and realized capital gains, overall net investment gains fell 6.4 percent to $55.7 billion in 2006 from $59.4 billion in 2005.
Although signs of price cuts were evident last year, the industry managed to post an increase in net written premiums, which climbed 4.3 percent to $443.8 billion.
Even after some adjustments for abnormal transactions in 2005, pushing the premium growth figure to 3.5 percent, this fell far short of growth in the economy, Mr. Murray said. "U.S. gross domestic product (GDP)–a dollar measure of national output–rose 6.3 percent in 2006," he reported.
ISO and PCI also reported the following results for 2006:
o Overall loss and loss adjustment expenses declined $27.9 billion, or 9 percent, to $283.7 billion in 2006 from $311.6 billion in 2005.
o Noncatastrophe loss and loss adjustment expenses declined $5.4 billion, or 1.9 percent, to $271.4 billion in 2006 from $276.8 billion a year earlier.
o Other underwriting expenses– primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes–rose $7.7 billion, or 7 percent, to $117.5 billion last year from $109.8 billion in 2005.
o The p-c insurance industry's statutory net worth, or policyholders' surplus, increased 14.4 percent to $487.1 billion at year-end 2006 from $425.8 billion at year-end 2005.
For the fourth-quarter:
o The industry's consolidated net income after taxes amounted to $18.8 billion, up 30.7 percent.
o The industry's combined ratio improved to 95 percent from 103.6 percent in fourth-quarter 2005.
o Net written premiums rose 1.7 percent to $106 billion in from $104.2 billion in fourth-quarter 2005.
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