2004 a “peak” year for underwriting results: Fitch

A review of 2004 yearend financial results reported by U.S. p&c insurers indicates last year was likely the “peak” of underwriting results in the current cycle, according to a new report by Fitch Ratings.
The rating agency notes many insurers produced combined ratios in the 80% and 90% range, and posted stronger underwriting results and improved profitability in 2004, even with high catastrophe losses related to hurricanes. For a group of 52 publicly-traded insurers rated by Fitch, the combined ratio for 2004 improved 2.8 percentage points to 95.2%.
However, premium growth was modest in 2004, representing the tail end of the hard pricing cycle which took hold after the September 11, 2001 terrorist attacks. Earned premium growth dropped to 15.2% in 2004 from 19.5% in 2003, and the rater notes this level is likely higher than that experienced by the industry overall (one reason being it includes some new Bermuda-based organizations which have experienced tremendous growth). Fitch expects premium growth to be even more modest in 2005, but notes “if rate declines remain modest, insurers will still produce underwriting profits in many areas going forward”.
Insurers saw some modest growth in investment income in 2004, but continued to struggle with reserving relative to the 1997-2001 accident years. Nonetheless, none of the companies reviewed posted a net loss in 2004 and average net income grew by 23%, while return on equity improved to 12.3% compared to 11.8% in 2003. And 29 of the 52 companies reported favorable net reserve development in 2004.
Looking to 2006 and beyond, Fitch notes, “the trend for loss costs in most segments continues to be upwards, while competitive pressures are likely to promote further premium rate reductions. These factors point to less favorable earnings prospects for the industry longer term”