U.S. Insurers’ 1-Q Earnings Soar on Underwriting Gains

U.S. property and casualty insurers brought home a return on equity (ROE) of 11.3% for the first quarter of this year with an underwriting profit of US$5.4 billion that saw the combined ratio dip year-on-year by more than six percentage points to 93.3%, according to data collected by the Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI). The most exciting development is that the industry is likely to end 2004 with an ROE of about 15%, says Robert Hartwig, chief economist of the Insurance Information Institute (III).

However, the latest financial data points to stalling premium growth, suggesting that rate strengthening may have reached a cyclical peak with typical competitive signs of a “soft market”emerging in many business lines, a joint statement released by the ISO and PCI says.

U.S. insurers more than doubled net taxed income for the first quarter of this year to US$13.3 billion compared with the US$6.5 billion reported for the same period a year go. This was largely attained by a hike in underwriting gains, showing marked recovery on 2003’s first quarter underwriting loss of US$1.5 billion. Improved investment performance also starred in the industry’s dramatic financial recovery for the latest reporting period, with net investment income clocking in at US$9.4 billion (2003 1-Q: US$9.2 billion) and realized capital gains at US$3.4 billion (2003 1-Q: US$1.2 billion). Overall net investment gain (income and capital gains) rose by 24% year-on-year to US$12.8 billion versus the US$10.3 billion disclosed at the end of the first quarter of last year.

Net earned premiums for the first quarter of this year rose by 7.1% to US$100.3 billion compared with the US$93.6 billion reported for the same period in 2003. Net written premiums lagged at an annual growth rate of 4.5%, pushing premiums for the latest reporting period to US$106 billion (2003 1-Q: US$101.4 billion). “…we are already seeing signs of an escalation of competition that threatens to undermine insurers’ profitability going forward”, comments John Kollar, vice president of consulting & research at the ISO. Furthermore, the PCI’s assistant vice president of research, Roger Kenney, notes that new premium growth has lagged economic growth within the U.S. by a significant margin. “Gross domestic product – accelerated to 6.7% [for 1-Q 2004] from 3.9%. The spread between premium growth and economic growth, which was positive a year ago, is now negative,” he observes.

Hartwig is also concerned with the market softening. “…pricing seems to be weakening more rapidly than anyone anticipated”. He believes current pricing competition is being driven by insurers having attained profit and underwriting targets sooner than expected. “Justified or not, the combination of rising inflation and slower premium growth could plunge the industry into a negative real growth situation by late this year or early 2005 for the first time since 1999.”

In contrast to better earnings and modest premium growth, claims costs for the first quarter of this year fell by 2.4% to US$68.4 billion versus the US$70.1 billion reported for the same period the year prior. This was largely due to a 30% decline in catastrophe loss costs over the comparable periods.