U.S. insurers reap strong underwriting gains for 2004

On the back of a strong underwriting performance, U.S. property and casualty insurers lifted net income for 2004 by 29% to US$38.7 billion compared with the US$30 billion reported the previous year. This saw the industry notch up a return on equity (ROE) of 10.5% for last versus the 9.5% return made over 2003, according to industry financial data collected by the Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI).

Insurers’ underwriting for last year produced profit of US$5 billion, reflecting an almost US$10 billion improvement on 2003’s loss of US$4.9 billion. Notably, companies were able to achieve this dramatic turnaround in underwriting despite catastrophic losses totaling about US$17.5 billion (primarily the result of five hurricane events), says Gregory Heidrich, senior vice president for policy development and research at the PCI. As a result of the underwriting improvement, the industry reduced its combined ratio for 2004 to 98.1% from the previous years 100.1% ratio. “If catastrophe losses had stayed at the level they were in 2003, insurers’ combined ratio would have improved all the way to 97.3% in 2004,” observes Heidrich.

Insurers were also able to boost total net investment gains (net investment income and realized capital gains) for 2004 by 8% year-on-year to US$48.9 billion compared with the previous year’s US$45.3 billion. The industry’s net investment income for last year rose year-on-year by 2.4% to US$39.6 billion while realized gains climbed to US$9.3 billion (2003: US$6.6 billion).

The industry’s growth in premiums slowed over 2004, with net written premiums clocking in at US$423.3 billion (2003: US$404.4 billion) showing a mere 4.7% rise over the previous year (2003’s net written premium growth came in at 9.4%). Similarly, net earned premiums increased last year by 6.8% to US$412.6 billion (2003’s net earned premium growth was 10.9%) from 2003’s US$386.3 billion. “The spread between premium growth and GDP [gross domestic product] growth [over 2004] also indicates softening insurance markets. That spread turned negative [in 2004], with premium growth in 2004 falling two percentage points short of the 6.6% increase in GDP last year. In 2003, premium growth exceeded GDP growth by 4.5 percentage points,” says John Kollar, vice president of consulting and research at the ISO.

Insurers’ claims costs grew at a more sedate 3.8% year-on-year increase over 2004 to reach US$299.5 billion (2003: US$288.7 billion). But, with the industry’s surplus having risen to a record US$393.5 billion by end 2004 (2003: US$347 billion), the rise in capacity within the marketplace coupled with stronger profitability has introduced more intense competition across the various lines of business, Kollar notes. And, as Robert Hartwig, chief economist of the Insurance Information Institute (III), point out, all indicators suggest that this heightened competition will see rising combined ratios over 2005 and reduced profitability of the industry. “Ominously, top-line growth in 2004 was well below expectations, with real growth in net written premiums likely to turn negative by late 2005,” he adds.