JERSEY CITY, N.J., July 25, 2005 — The U.S. property/casualty industry's net gain on underwriting rose 34.8 percent to a record $7.1 billion in first-quarter 2005 from $5.3 billion in first-quarter 2004, as the combined ratio — a key measure of losses and other expenses per dollar of premium — improved to 91.9 percent from 93.3 percent. The $7.1 billion net gain on underwriting is the largest experienced any quarter since the start of records extending back to 1986. Similarly, the 91.9 percent combined ratio for first-quarter 2005 is the best for any quarter.
Reflecting the improvement in underwriting results and other factors, the property/casualty industry's net income after taxes rose 29.4 percent to $17.3 billion in the first three months of 2005 from $13.4 billion in the first three months in 2004. Adjusted for special dividends one insurer received from an investment subsidiary, net income after taxes rose 12.5 percent to $15 billion in first-quarter 2005. Even after adjusting for those dividends, the industry's net income for first-quarter 2005 was $1.7 billion higher than the previous record for any quarter, set in first-quarter 2004.
The industry's consolidated surplus — its assets minus its liabilities — rose $8.3 billion, or 2.1 percent, to a record-high $401.8 billion at March 31, 2005, from $393.5 billion at December 31, 2004, according to ISO and the Property Casualty Insurers Association of America (PCI).
But growth in net written premiums slowed to 2.4 percent versus year-ago levels in first-quarter 2005 from 4.6 percent in first-quarter 2004 and 12.3 percent in first-quarter 2003, amid signs of intensifying competition in insurance markets. While insurers' earnings may increase for a few quarters as past rate increases continue working their way down to the bottom line, signs of escalating competition suggest insurers' earnings are approaching a cyclical peak.
The ISO and PCI industry figures for first-quarter 2005 are consolidated estimates for all private property/casualty insurers based on the reports of insurers that account for about 93 percent of all business written by private U.S. property/casualty insurers.
"Even with remarkable underwriting results for first-quarter 2005 and $2.3 billion in special dividends, the industry's statutory rate of return on average surplus for the 12 months ending March was just 11.2 percent — down from 11.4 percent for the 12 months ending March 2004. Furthermore, we are already seeing signs of an increase in competition that could undermine insurers' profitability going forward," observed John J. Kollar, ISO vice president for consulting and research. The ISO executive noted that written premium growth peaked at 16.8 percent in the third quarter of 2002 and has since dwindled to just one-seventh of that. "ISO MarketWatchTM data shows a similar trend, with premium rate increases on renewals for the MarketWatch lines as a group peaking at 12.9 percent in July 2002 and losing momentum ever since, dwindling to just 0.1 percent in March 2005. Moreover, MarketWatch data shows that rates on renewals are now declining for four of seven major commercial lines," added Kollar.
"Government economic data also suggests that competition in insurance markets is intensifying," said Gregory Heidrich, the PCI's senior vice president for policy development and research. "In first-quarter 2003, when insurance markets were firming, written premium growth exceeded current dollar GDP — gross domestic product — growth by 10.4 percentage points. By first-quarter 2004, the spread between premium growth and GDP growth had turned negative and, in first-quarter 2005, premium growth fell 1.3 percentage points short of GDP growth. The Consumer Price Indexes for Motor Vehicle Insurance and Tenants' and Household Insurance also indicate increasingly competitive conditions in insurance markets. For example, the CPI for Motor Vehicle Insurance rose 9.3 percent versus year ago in the third quarter of 2003, but increases in that measure of what consumers are paying for auto insurance slowed to 3.2 percent versus year ago in first-quarter 2005 and 2.4 percent in second-quarter 2005," added Heidrich.
Also contributing to the increase in net income, the industry's pre-tax net investment gains — the sum of realized capital gains and net investment income (primarily dividends earned from stocks and interest on bonds) — rose $2.2 billion, or 17.5 percent, to $15 billion in first-quarter 2005 from $12.7 billion in first-quarter 2004. But adjusted for $2.3 billion in special dividends, net investment gains fell 0.3 percent to $12.7 billion.
Based on reported results, net investment income rose 44.4 percent to $13.5 billion in first-quarter 2005 from $9.4 billion in first-quarter 2004. Adjusted for special dividends, investment income rose 20.2 percent to $11.2 billion.
"Investment income is up 20.2 percent after adjusting for special dividends because insurers are holding more invested assets and the yield on those assets has increased," said Kollar. He noted that insurers' average holdings of cash and invested assets rose 9.5 percent to $1.0 trillion in first-quarter 2005 from $951.7 billion in first-quarter 2004 and that the annualized yield on those assets rose 9.8 percent. Nonetheless, the outlook for investment income is mixed, according to Kollar. "The Federal Reserve Board has raised its benchmark short-term interest rate nine times since June 2004. With the Fed having raised interest rates as recently as the end of last month and many economists expecting the Fed to continue raising short-term rates, investment yields are poised to rise from current levels. But intensifying competition in insurance markets could undermine the underwriting cash flows that have fueled growth in cash and invested assets," added Kollar.
Realized capital gains declined $1.9 billion, or 57.1 percent, to $1.4 billion in the first three months of 2005 from $3.4 billion in the first three months of 2004.
The industry's pre-tax operating income — the sum of its gain or loss on underwriting, its net investment income and other miscellaneous income — rose $5.8 billion, or 39.5 percent, to $20.6 billion in first-quarter 2005 from $14.8 billion in first-quarter 2004. Adjusted for special dividends, pre-tax operating income increased $3.6 billion, or 24.2 percent, to $18.3 billion. Detracting slightly from the growth in operating income, miscellaneous other income fell $0.2 billion to negative $0.1 billion in first-quarter 2005 from $0.1 billion in first-quarter 2004.
Combining the industry's operating income and its realized capital gains, its net income before taxes rose $3.9 billion, or 21.6 percent, to $22 billion in first-quarter 2005 from $18.1 billion in first-quarter 2004. Adjusted for special dividends, net income before taxes increased $1.6 billion, or 9.1 percent, to $19.8 billion in first-quarter 2005. Despite the increase in net income before taxes, the industry incurred $4.7 billion in income taxes in first-quarter 2005 — the same amount it incurred in first-quarter 2004.
The improvement in underwriting results in first-quarter 2004 reflects the excess of growth in premiums over growth in loss and loss adjustment expenses, other underwriting expenses and dividends to policyholders. Net written premiums rose $2.6 billion, or 2.4 percent, to $108.4 billion in first-quarter 2005 from $105.8 billion in first-quarter 2004. Net earned premiums rose $3.5 billion, or 3.5 percent, to $103.5 billion in first-quarter 2005 from $100.0 billion a year earlier.
Overall loss and loss adjustment expenses increased $0.9 billion, or 1.4 percent, to $69.1 billion in first-quarter 2005 from $68.2 billion in first-quarter 2004. But catastrophe losses more than doubled to $2.1 billion in the first three months of this year from $1 billion in the first three months of 2004, according to ISO's Property Claim Services unit. Noncatastrophe loss and loss adjustment expenses fell 0.2 percent to $67 billion in first-quarter 2005 from $67.1 billion in first-quarter 2004.
"The increase in catastrophe losses added 1.1 percentage points to the industry's combined ratio for first-quarter 2005," noted Heidrich. "If catastrophe losses had stayed at the level experienced in first-quarter 2004, the combined ratio for the first three months of this year would have improved all the way to 90.9 percent. And with second-quarter catastrophe losses declining to $0.9 billion in 2005 from $2.3 billion in 2004, we already know that underwriting results for the first-half of this year will benefit from a net decline in catastrophe losses. But the hurricane season has just begun and forecasters are expecting it to be severe, meaning it's far too soon to declare that insurers have dodged the bullet," added Heidrich.
"Unfortunately, we can't expect noncatastrophe loss and loss adjustment expenses to continue declining," observed Kollar. "Inflation remains an ever-present fact of life, with the CPI for Medical Care rising 4.2 percent versus year ago in second-quarter 2005 and the CPI for Motor Vehicle Repairs rising 3.1 percent. This suggests that underwriting profitability may soon come under pressure from two directions — rising loss costs and softening in the price of insurance," added Kollar.
Other underwriting expenses — primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — rose $0.7 billion, or 2.8 percent, to $27.0 billion in first-quarter 2005 from $26.3 billion a year earlier.
Dividends to policyholders fell 9.5 percent to $0.3 billion in first-quarter 2005.
The net gain on underwriting in first-quarter 2005 amounts to 6.9 percent of the premiums earned during the quarter. The underwriting gain in first-quarter 2004 amounted to 5.3 percent of the premiums earned during that period.
The $8.3 billion increase in surplus in first-quarter 2005 consisted of $17.3 billion in net income after taxes and $1.2 billion in new funds paid in, less $5.9 billion in unrealized capital losses on investments, $4.0 billion in dividends to stockholders and $0.4 billion in miscellaneous charges against surplus. The special dividends received by one insurer from an investment subsidiary had no net effect on the change in surplus, as those dividends were offset by an unrealized capital loss.
The $1.2 billion in new funds paid in during first-quarter 2005 is more than twice the $0.5 billion in new funds paid in during first-quarter 2004.
The $5.9 billion in unrealized capital losses on investments in first-quarter 2005 constitutes an $8.2 billion adverse swing from the $2.3 billion in unrealized capital gains on investments in first-quarter 2004. However, adjusted for unrealized capital losses one insurer posted as it received special dividends from an investment subsidiary, the industry suffered just $3.7 billion in unrealized capital losses during the first three months of 2005.
"Combining insurers' realized capital gains on investments with their unrealized capital losses, insurers suffered $4.5 billion in total capital losses in first-quarter 2005. Adjusted for unrealized losses associated with special dividends, insurers suffered $2.2 billion in total capital losses during the period," said Heidrich. "Insurers' overall capital losses in first-quarter 2005 reflect developments in financial markets, with the S&P 500 declining 2.6 percent from year-end 2004 to March 31 as the New York Stock Exchange Composite fell 1.1 percent. In the first quarter of 2004, insurers enjoyed $5.7 billion in total capital gains as the S&P 500 increased 1.3 percent and the NYSE Composite rose 2.5 percent. Looking beyond first-quarter 2005, most major stock market indicators were up slightly in the second quarter, with the S&P 500 rising 0.9 percent from March 31 to June 30. This suggests that insurers' results for second-quarter 2005 will benefit from modest capital gains but, further out, any forecast for capital gains is only as good as the underlying forecast for stock prices," added Heidrich.
The $4 billion in dividends to shareholders in first-quarter 2005 is more than twice the $1.9 billion in dividends to shareholders in first-quarter 2004.
The $0.4 billion in miscellaneous charges against surplus in the first three months of 2005 is an improvement from the $1.8 billion in miscellaneous charges against surplus in the first three months of 2004.
|OPERATING RESULTS FOR 2005 AND 2004 ($ Millions)|
|NET WRITTEN PREMIUM||108,359||105,776|
|NET EARNED PREMIUM||103,521||100,029|
|INCURRED LOSS & LOSS ADJUSTMENT EXPENSE||69,104||68,171|
|STATUTORY UNDERWRITING GAIN (LOSS)||7,406||5,589|
|NET UNDERWRITING GAIN (LOSS)||7,147||5,303|
|PRE-TAX OPERATING INCOME||20,587||14,754|
|NET INVESTMENT INCOME EARNED||13,505||9,355|
|NET REALIZED CAPITAL GAIN (LOSS)||1,446||3,372|
|NET INVESTMENT GAIN||14,951||12,727|
|NET INCOME AFTER TAXES||17,307||13,380|
|LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES||462,613||427,430|
|COMBINED RATIO, POST-DIVIDENDS, PERCENT||91.9||93.3|
Michael R. Murray (ISO)
Joseph Annotti (PCI)
Loretta Worters (III)