U.S. first quarter results shine on underwriting gains

U.S. property and casualty insurers have cause to celebrate, posting net income for the first quarter more than double that reported a year earlier, as rate increases over the past three years make their way to the bottom-line.
Overall, net income for the quarter ending March 31, 2004 was US$13.3 billion, up from US$6.5 billion a year earlier, with the industry posting an underwriting profit for only the second time since 1986, according to results released by the Insurance Services Office (ISO) and Property-Casualty Insurers Association of America (PCI).
However, premium growth slowed in the first quarter of 2004 to just 4.5%, well off the 12.7% growth seen in first quarter 2003, and far short of the 16.8% growth seen when rate hikes peaked in third quarter 2002.
Analysts are concerned about the drop in premium growth. “With insurers hitting price, profit and underwriting targets more quickly than they expected, the market has turned price-competitive sooner than would otherwise be the case,” notes Robert Hartwig, chief economist for the Insurance Information Institute. “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.”
The industry benefited from low losses, including a relatively calm first quarter for catastrophes. Loss and loss-adjustment expenses dropped 2.4% to US$68.4 billion in first quarter 2004 from US$70.1 billion in first quarter 2003. At the same time, catastrophe losses fell 29.8% to US$1 billion in the first quarter of this year, from US$1.5 billion a year earlier.
The industry cannot rely on having such good fortune during the remainder of 2004, observes Roger Kenney, PCI’s assistant vice president for research. “With forecasters predicting an unusually severe hurricane season this year and some industry observers believing that insurers’ loss and loss-adjustment expense reserves for asbestos and other claims are deficient, there’s a real possibility that loss and loss-adjustment expenses could increase substantially at the same time that competition in insurance markets intensifies putting pressure on underwriting profitability.”
Nonetheless, U.S. insurers posted a “remarkable” underwriting profit of US$5.4 billion in the first quarter of 2004, compared to a net underwriting loss of US$1.5 billion the year prior. The combined ratio dropped well below analysts’ expectations to 93.3% for the first quarter of this year from 99.6% in first quarter 2003.
Investments also boosted insurer returns, with pre-tax net investment gains (including realized gains) up 23% to US$12.8 billion from US$10.4 billion a year ago. The US$12.8 billion result comes from US$9.4 billion in net investment income (Q1 2003: US$9.2 billion) and US$3.4 billion in realized capital gains (Q1 2003: US$1.2 billion).
The industry’s consolidated surplus – its assets minus its liabilities rose 4.1% to $361.2 billion at March 31, 2004, from $347 billion at December 31, 2003.
Still, analysts caution the industry is not performing to the level seen in other Fortune 500 companies. “Even with remarkably good underwriting results and insurers’ net income more than doubling in first quarter 2004, the industry’s statutory rate of return on average surplus for the 12 months ending March was just 11.3%, and we are already seeing signs of an escalation of competition that threatens to undermine insurers’ profitability going forward,” observes John J. Kollar, ISO vice president for consulting and research.
Hartwig notes that the “old rule of thumb” that the industry need only produce a combined ratio below 100% to see adequate rates of return has become an “urban legend that just won’t seem to go away”. “In today’s low interest rate and volatile investment environment, a combined ratio of 93 to 95 is what it takes to generate Fortune 500 rates of return.” He adds despite growth in policyholder surplus continues to lag overall economic growth compared to mid-1999, policyholder surplus is up just 6.5%. “The combination of economic growth and greater demand for insurance along with new and emerging risks illustrates the fact that the industry’s policyholder surplus is fully committed. Increasing the size of that pool is necessary in order to finance the insurance needs of a growing U.S. economy as well as claims arising from a virtually unlimited array of new and existing risks.”