U.S. Insurers’ 2004 Nine-Month Return Hits “Zenith”

U.S. property and casualty insurers boosted net profitability for the first nine months of 2004 by 28.3% to US$26.7 billion compared with the US$20.8 billion reported for the same period a year ago, according to industry financial data released by the Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI). The insurance industry’s latest nine month financial result translates to a ROE of 9.9%, which was largely driven by healthy underwriting gains over the period despite the hefty US$21.6 billion catastrophe loss incurred in the third quarter as a result of hurricanes Charley, Frances Ivan and Jeanne.

Insurers produced a net underwriting profit for 2004’s first three quarters of US$2.8 billion versus the US$5.8 billion loss reported for the same period the previous year. Companies also benefited from a robust 15.2% year-on-year increase in net investment gain (realized gains and net income combined), largely on the back of higher realized capital gains of US$6.4 billion. Despite the strong performance of insurers over the nine month period – which suggests the industry will likely generate for 2004 its first underwriting profit for a full calendar year in more than a quarter century – analysts from the ISO, PCI and the Insurance Information Institute (III) believe that earnings have reached a “zenith point”, with many market factors suggesting that profitability will decline over 2005.

A significant factor influencing the industry’s potential profitability this year is a slow-down in premium growth. Insurers saw net written premiums rise year-on-year by 4.5% to US$321.2 billion (first nine months 2003: US$307.4 billion) for the first nine months of 2004 while net earned premiums grew by 7% to US$ 307.1 billion (first nine months 2003: US$287.3 billion). In contrast, growth in net written premiums for the same period in 2003 was 8% while earned premiums grew by 7%. “Ominously, top-line growth during the first nine months of 2004 is well below expectations, with real growth in net written premiums likely to turn negative by 2005,” says Robert Hartwig, chief economist at the III. “The combination of rising inflation and slower premium growth could plunge the industry into a negative real growth situation my mid-2005 for the first time since 1999…On a catastrophe-adjusted basis, 2004 is likely to represent the zenith in the current cycle in terms of underwriting and profit performance,” he adds.

Although the industry’s premium growth slowed over the course of the nine month period, insurers saw claims costs rise at an even more sedate 3% to US$223.6 billion with a loss ratio of 72.8% compared with the US$216.7 billion (75.4% loss ratio) reported for the same period a year ago. Insurers’ combined ratio for the latest nine months shows greater improvement at 97.9% versus the 100.3% ratio reported for the same period in 2003. Notably, the industry generated an underwriting loss of US$6 billion with a combined ratio of 104.7% for 2004’s third quarter – due to the cat loss caused by the four hurricanes. “As good as results through nine-months 2004 were, they would have been much better if not for the four hurricanes in the third quarter,” comments John Kollar, vice president of consulting and research at the ISO.