U.S. insurers on track for first underwriting profit in decades

U.S. insurers’ results of the first nine months of 2004 show them well on their way to the first underwriting profit in more than 25 years. According to data released by the Insurance Services Office (ISO) and Property-Casualty Insurers Association of America (PCI), U.S. insurers weathered a record hurricane season to produce a net underwriting profit of $2.85 billion, on a combined ratio of 97.9% in the first nine months of 2004. This compares with a net underwriting loss of $5.85 billion, on a combined ratio of 100.3% a year earlier. The last time the industry produced an underwriting profit was in 1978, when the combined ratio dropped to 97.5%, notes Robert Hartwig, chief economist for the Insurance Information Institute (III).
Insurers produced net income of $26.71 billion in the first three quarters of 2004, up from $20.82 billion for the same period a year ago.
For the most recent quarter, Hurricanes Charley, Francis, Jeanne and Ivan, pushed the industry into a $6.09 billion underwriting loss on a combined ratio of 104.7%, almost double the underwriting loss of $3.04 billion (combined ratio: 101.3%) produced in the third quarter last year. Still, insurers produced net income of $3.45 billion for the most recent quarter, but this was almost half the income of $6.35 billion produced for the third quarter of 2003.
Net written premiums were up 4.5% during the first nine months of 2004 to $321.23 billion, from $307.47 billion the year prior (although this represented 9.7% growth at the time), while net earned premiums rose to $307.13 billion from $287.35 over the same comparative period. For the third quarter of this year, net written premiums were up to $109.46 billion from $105.36 billion the year before. And net earned premiums were up to $104.95 billion from $98.22 billion over the same comparative period.
Net investment gain in the first nine months of 2004 amounted to $35.20 billion (including net realized gains of $6.45 billion), up from $33.26 billion (realized gains, $5.58 billion) the year prior. For the third quarter of 2004, net investment gain came in at $11.47 billion (with realized gains of $1.63 billion), compared to $10.53 billion (with realized gains of $1.11 billion) for the same period a year ago.
Despite these strong results, Hartwig notes in his commentary that the 2004 results probably represent a “zenith” in insurers’ underwriting performance. This is not only the result of evidence of softer pricing creeping into the market premium growth is falling off at a pace even faster than analysts predicted, Hartwig notes – but also the likely costs associated with the investigation into broker compensation practices.
And insurers continue to lag many other industries in terms of returns return on average surplus for the first nine months of this year was 9.9%, up from 9.2% at the same point in 2003. “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. The fact that the industry’s average return on surplus is an estimated 9.9 percent, despite a combined ratio of just 97.9 during the first half, is a stark reminder that a renewed commitment to underwriting and pricing discipline are needed if the industry hopes to maintain Fortune 500 rates in 2005,” Hartwig notes.