October 17, 2005 by Canadian Underwriter
The U.S. p&c industry recorded an underwriting profit of US$13.2 billion during the first six months of 2005, according to A.M. Best Company.
Robust operating results drove the industry’s surplus base upwards despite unrealized capital losses, increased shareholder dividends and other losses in surplus as insurers continued to benefit from the hard market. However, these results were driven largely by rate increases on policies that were written in prior periods.
The current pricing and policy term environment, A.M. Best anticipates, will drive future results that, based on indicators prior to Hurricane Katrina, indicated rate decreases and competition on many lines of business were emerging during the first half of 2005, according to the report.
This trend is expected to be reversed in the third quarter on many lines of business.
While current estimates of insured losses vary widely, ranging from US$25 billion to US$60 billion, net income of US$32.1 billion for the first half of 2005, combined with profits on non-catastrophe-impacted businesses during the second half, will help enable the U.S. p&c industry to absorb the largest insurance loss in history.
A.M. Best says the impact of Katrina and, to a lesser extent, Hurricane Rita, will be reflected in third-quarter results and likely will deplete the annual earnings of the industry; especially for carriers with homeowners, automobile, commercial property, marine, energy and property reinsurance exposures concentrated in Louisiana, Mississippi and Alabama. However, while A.M. Best anticipates the effects of these storms likely will add several points to the loss ratios of many carriers, the overall impact of the storms is not expected to create widespread solvency issues. Rather, a few insurers that will not be able to recapitalize their balance sheets to the level that supports their ratings, or whose risk management capabilities have been called into question, will suffer downgrades to their financial strength and credit ratings.
Despite the solid results posted for the first six months of 2005, A.M. Best Co. is concerned with the reduction of year-over-year premium rate increases that persisted for consecutive reporting periods since 2003 and gave way to premium decreases across most lines of business and sizes of accounts in 2005.
Through the first six months of 2005, the p&c industry continued to build upon its capital base through strong operating results, A.M. Best reports. These results were driven by both a significant underwriting profit as prior-year rate increases were earned throughout the period, and increased investment income from a larger investment base as a result of favorable operating cash flow. However, the report says that while the first half of the year had relatively low catastrophe losses, the full year 2005 will end up being one of the worst catastrophe years for the U.S. p&c industry, driven by Hurricane Katrina losses.
In addition, potential loss-reserve charges loom as the industry’s estimated reserve shortfall by A.M. Best on core reserves is US$25 billion and US$34 billion on A&E reserves. With companies historically reviewing reserve adequacy in the second half of the year, A.M. Best believes loss-reserve charges are imminent and will pressure margins. Nevertheless, despite the ever-prevalent reserve charges and catastrophe losses, A.M. Best believes that 2005 will be a profitable year for the consolidated property/casualty industry, although a second consecutive year of underwriting profit may be in question.