Record First-Half Profits and Surplus Boost Property/Casualty Insurers' Ability to Cover Hurricane Claims

January 1, 2011 / 13 min read

JERSEY CITY, N.J., Oct. 5, 2005 — The U.S. property/casualty insurance industry's net income after taxes rose 29.1 percent to a record $30.9 billion in first-half 2005 from $23.9 billion in first-half 2004. Reflecting the industry's income, its consolidated surplus, or statutory net worth, increased 4.7 percent to $412.5 billion at June 30 from $393.8 billion at year-end 2004, according to ISO and the Property Casualty Insurers Association of America (PCI).

The industry's strong performance in first-half 2005 could not have come at a better time for insurers now facing billions and billions of dollars in insured losses from Hurricanes Katrina and Rita.

The industry's income in first-half 2005 surpassed its income during any other six-month period since the start of ISO's quarterly records in 1986, both before and after adjusting for inflation. The industry's surplus as of June 30, 2005, was also a record before and after adjusting for inflation. Increases in net gains on underwriting and net investment income drove the growth in net income and surplus. Net gains on underwriting increased 43.5 percent to $13.2 billion in first-half 2005 from $9.2 billion in first-half 2004, as the combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved 1.5 percentage points to 92.7 percent from 94.3 percent. Net investment income — primarily dividends from stocks and interest on bonds — grew 32.7 percent to $25.3 billion in six-months 2005 from $19 billion in six-months 2004.

"Insurers' underwriting results for first-half 2005 were truly remarkable," said John J. Kollar, ISO vice president for consulting and research. "At 92.7 percent, the combined ratio for first-half 2005 was the best first-half combined ratio since the start of quarterly records extending back to 1986. Insurers' record net gains on underwriting in first-half 2005 were all the more remarkable given that, prior to 2004, insurers suffered net losses on underwriting during the first half of every year."

"Insurers' investment income in first-half 2005 benefited from $3.1 billion in one-time only special dividends one insurer received from an investment subsidiary," said Gregory Heidrich, PCI senior vice president for policy development and research. "But even excluding those special dividends, investment income rose 16.5 percent to $22.2 billion in first-half 2005, as insurers' average holdings of cash and invested assets grew 9.7 percent and the annualized yield on cash and invested assets rose to 4.2 percent in first-half 2005 from just under 4 percent in first-half 2004."

Reflecting the increases in net gains on underwriting, investment income and net income after taxes, the industry's annualized rate of return on average surplus rose to 15.3 percent in first-half 2005 from 13.4 percent in first-half 2004.

"The industry's annualized rate of return through six months bounced back from a cyclical low of 1.8 percent in first-half 2001 to its highest level since the start of records in 1986, but losses from Katrina and Rita will have a substantial impact on insurers' profitability for 2005 as a whole," observed Kollar. "Using the actual tax rates and surplus as of June 30, each $10 billion in net losses from those hurricanes could reduce the industry's net income after taxes for full-year 2005 by $7.4 billion and cut its annual rate of return by two percentage points."

"With ISO's Property Claim Services unit reporting that Hurricane Katrina caused $34.4 billion in insured losses to property, and various sources estimating losses from Hurricane Rita at between $2.5 billion and $7 billion, those storms could cut the industry's rate of return for full-year 2005 by 7 or 8 percentage points if U.S. insurers had to shoulder the entire burden," said Heidrich. "Once we have good estimates of the losses that will be covered by foreign reinsurers and residual market mechanisms, we'll be able to develop a more precise assessment of the financial impact of Katrina and Rita on the domestic insurance industry."

The figures are consolidated estimates for all private property/casualty insurers based on reports accounting for about 93 percent of all business written by private U.S. property/casualty insurers.

Pre-tax operating income — the sum of gains or losses on underwriting, net investment income and miscellaneous other income — climbed $10.7 billion, or 37.7 percent, to $39.1 billion in first-half 2005 from $28.4 billion in first-half 2004. Contributing to the growth in operating income, net gains on underwriting increased $4 billion, net investment income rose $6.2 billion and miscellaneous other income increased to $0.6 billion in first-half 2005 from $0.2 billion in first-half 2004.

Partially offsetting the $10.7 billion increase in pre-tax operating income, realized capital gains on investments declined $2.2 billion, or 45.2 percent, to $2.6 billion in first-half 2005 from $4.8 billion in first-half 2004, and the industry's federal income taxes rose $1.6 billion, or 17 percent, to $10.8 billion from $9.2 billion. Reflecting the changes in pre-tax operating income, realized capital gains and federal income taxes, insurers' net income after taxes rose $7 billion in first-half 2005.

Combining realized capital gains and net investment income, net investment gains rose $4.1 billion, or 17.1 percent, to $27.9 billion in the first half of 2005 from $23.8 billion in the first half of 2004.

The net gains on underwriting in first-half 2005 amount to 6.3 percent of the $209.4 billion in premiums earned during the period, up from 4.5 percent of the $202.8 billion in premiums earned in first-half 2004.

Underwriting results improved even though premium growth slowed. Net written premiums climbed $4.8 billion to $217.3 billion in first-half 2005 from $212.5 billion in first-half 2004, but written premium growth slowed to 2.3 percent in first-half 2005 from 5.1 percent in first-half 2004, 10.6 percent in first-half 2003 and a cyclical peak of 12.2 percent in first-half 2002. At 2.3 percent, first-half written premium growth had slowed to its slowest pace since first-half 1999, when written premiums grew 1 percent. Similarly, net earned premiums rose $6.6 billion to $209.4 billion in first-half 2005 from $202.8 billion in first-half 2004, but earned premium growth slowed to 3.3 percent in first-half 2005 from 7.2 percent in first-half 2004 and a cyclical peak of 11.8 percent in first-half 2003. At 3.3 percent, earned premium growth had slowed to its slowest pace since first-half 2000, when earned premiums grew 3.2 percent.

Overall loss and loss adjustment expenses increased $0.5 billion, or 0.4 percent, to $140.7 billion in first-half 2005 from $140.2 billion in first-half 2004, as catastrophe losses fell $0.3 billion, or 8.9 percent, to $3.1 billion in first-half 2005 from $3.4 billion in first-half 2004, according to ISO's Property Claim Services (PCS) unit. The $3.1 billion in catastrophe losses during first-half 2005 compares with an average of $4.5 billion in first-half catastrophe losses during the 10 years from 1995 to 2004. Non-catastrophe loss and loss adjustment expenses rose $0.8 billion, or 0.6 percent, to $137.6 billion in first-half 2005 from $136.8 billion a year earlier.

Other underwriting expenses — primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — rose $2.1 billion, or 3.9 percent, to $54.9 billion in the first half of this year from $52.8 billion in the first half of last year.

Dividends to policyholders rose 1.6 percent to $537 million in first-half 2005 from $528 million in first-half 2004.

The $18.7 billion increase in the industry's consolidated surplus in first-half 2005 compares with a $22.1 billon increase in first-half 2004. The increase in surplus in first-half 2005 consisted of $30.9 billion in net income after taxes and $2.4 billion in new funds paid in, less $5.4 billion in unrealized capital losses on investments, $7.5 billion in dividends to stockholders and $1.7 billion in miscellaneous charges against surplus.

The $5.4 billion in unrealized capital losses in first-half 2005 constitutes an $8.9 billion adverse swing from the $3.5 billion in unrealized capital gains in first-half 2004. Combining the $5.4 billion in unrealized capital losses in first-half 2005 with the $2.6 billion in realized capital gains during the period, insurers suffered $2.8 billion in overall capital losses during the first half of 2005, with those losses constituting an $11.1 billion adverse swing from insurers' $8.3 billion in overall capital gains during the first half of 2004.

The $2.4 billion in new funds paid in during first-half 2005 is up from the $2 billion in new funds paid in during first-half 2004.

The $7.5 billion in dividends to stockholders in six-months 2005 is up 52.4 percent from the $4.9 billion in dividends to stockholders in six-months 2004.

The $1.7 billion in miscellaneous charges against surplus through six-months 2005 compares with $2.4 billion in miscellaneous charges against surplus through six-months 2004.

"The capital losses on investments in the first half of 2005 reflect developments in financial markets," noted Heidrich. "During the first half of this year, the S&P 500 fell 1.7 percent, the Dow Jones Industrial Average fell 4.7 percent and the NASDAQ fell 5.4 percent. But with the S&P 500 increasing 3.1 percent from June 30 to September 30 and other major market indicators also rising since June, we have reason to expect insurers' results for third-quarter 2005 will benefit from market-driven capital gains on investments.

"Developments in financial markets also bode well for investment income," added Heidrich. "The Federal Reserve started raising interest rates on June 30, 2004, increasing its benchmark short-term interest rate nine times for a total of 2.25 percentage points to 3.25 percent as of June 30, 2005. And the Federal Reserve has raised its benchmark rate twice since the end of June — on August 9 and September 20 — giving us reason to expect insurers' yield on cash and invested assets and their investment income (excluding special dividends) will continue increasing for some time to come."

"While the outlook for investment results is positive, we're watching a number of wild cards in the outlook for underwriting results," noted Kollar. "We know that underwriting results will be adversely impacted by losses from Katrina and Rita. But we don't yet know the extent of insured losses from those storms and how those losses will affect competitive dynamics and pricing in insurance markets.

"Before the hurricanes, there were indications that pricing in insurance markets was starting to soften," observed Kollar. "For example, ISO MarketWatchTM data shows that actual rate changes on renewals for commercial insurance polices turned positive in mid-1999 and gained momentum through July 2002, when they peaked at 12.9 percent. But ISO MarketWatch rate changes on renewals then dwindled to just 0.1 percent in March 2005. And the Council of Insurance Agents and Brokers' second-quarter 2005 rate survey indicates commercial insurance prices fell an average of 9.7 percent for all sizes of accounts. But with hurricane-related losses cutting deeply into reinsurance capacity, it now seems likely that increases in reinsurance costs will lead to upward pressure on insurance prices. Another factor contributing to upward pressure on insurance prices is the growing evidence that we've entered a period when there will be more hurricanes and more severe hurricanes than there were during the half century ending 2000, when we enjoyed a 50-year interlude of unusually mild weather."

Second-Quarter Results
The industry's consolidated net income after taxes for second-quarter 2005 amounted to $13.3 billion, up 29 percent from the $10.3 billion in net income for second-quarter 2004. The industry's net income for second-quarter 2005 reflects the excess of $18.1 billion in pre-tax operating income and $1.2 billion in realized capital gains on investments over $6 billion in federal income taxes.

The industry's second-quarter pre-tax operating income of $18.1 billion is up from $13.4 billion in second-quarter 2004. Second-quarter 2005 operating income consisted of $6 billion in net gains on underwriting, $11.5 billion in net investment income and $0.7 billion in miscellaneous other income.

The $6 billion in net gains on underwriting in second-quarter 2005 is up 58.7 percent from $3.8 billion in second-quarter 2004. Underwriting results benefited from sharply lower catastrophe losses, which fell 60.9 percent to $0.9 billion in second-quarter 2005 from $2.3 billion in second-quarter 2004, according to ISO's PCS unit. The $0.9 billion in catastrophe losses during second-quarter 2005 compares with an average of $3.2 billion in second-quarter catastrophe losses during the 10 years from 1995 to 2004.

Second-quarter 2005 net gains on underwriting amount to 5.7 percent of the $105.5 billion in premiums earned during the period, up from 3.7 percent of the $102.5 billion in premiums earned during second-quarter 2004.

The industry's combined ratio improved to 93.6 percent in second-quarter 2005 from 95.4 percent in second-quarter 2004. At 93.6 percent, the industry's second-quarter combined ratio improved to its best level since at least 1986, when ISO's quarterly records begin.

The $6 billion in net gains on underwriting is after deductions for $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders rising slightly from $0.2 billion in second-quarter 2004.

Written premiums rose to $108.6 billion in second-quarter 2005 from $106.4 billion in second-quarter 2004, but second-quarter written premium growth dropped to 2.1 percent in 2005 from 5.3 percent in 2004, 9 percent in 2003 and a cyclical peak of 14.4 percent in 2002. At 2.1 percent, second-quarter premium growth had dropped to its slowest pace since the 1.1 percent increase in second-quarter 1999.

The $11.5 billion of net investment income is up 19.3 percent from $9.6 billion in the same period last year. Excluding $0.8 billion in special dividends one insurer received during second-quarter 2005, investment income rose 10.9 percent to $10.7 billion.

The $0.7 billion in miscellaneous other income is up from negative $25 million in second-quarter 2004.

The $1.2 billion in realized capital gains is down 16.1 percent from the $1.4 billion in realized capital gains during the second quarter of 2004.

Combining net investment income and realized capital gains, the industry posted $12.7 billion in net investment gains in second-quarter 2005, up 14.7 percent from $11.1 billion a year earlier.

Unrealized capital gains on investments dropped 24.4 percent to $1 billion in second-quarter 2005 from $1.3 billion in second-quarter 2004. Combining realized and unrealized capital gains, total capital gains dropped 20 percent to $2.2 billion in second-quarter 2005 from $2.7 billion in second-quarter 2004.

OPERATING RESULTS FOR 2005 and 2004 ($ Millions)

FIRST HALF	2005	2004
NET WRITTEN PREMIUM	217,327	212,498
NET EARNED PREMIUM	209,376	202,781
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	140,704	140,191
STATUTORY UNDERWRITING GAIN (LOSS)	13,756	9,742
POLICYHOLDERS' DIVIDENDS	537	528
NET UNDERWRITING GAIN (LOSS)	13,219	9,213
PRE-TAX OPERATING INCOME	39,105	28,406
NET INVESTMENT INCOME EARNED	25,257	19,039
NET REALIZED CAPITAL GAIN (LOSS)	2,616	4,770
NET INVESTMENT GAIN	27,873	23,809
NET INCOME (LOSS) AFTER TAXES	30,925	23,948
SURPLUS (CONSOLIDATED)	412,509	369,169
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	468,986	435,250
COMBINED RATIO, POST-DIVIDENDS (%)	92.7	94.3
SECOND QUARTER	2005	2004
NET WRITTEN PREMIUM	108,629	106,355
NET EARNED PREMIUM	105,534	102,454
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	71,456	71,834
STATUTORY UNDERWRITING GAIN (LOSS)	6,258	4,010
POLICYHOLDERS' DIVIDENDS	278	242
NET UNDERWRITING GAIN (LOSS)	5,980	3,768
PRE-TAX OPERATING INCOME	18,141	13,360
NET INVESTMENT INCOME EARNED	11,476	9,616
NET REALIZED CAPITAL GAIN (LOSS)	1,207	1,438
NET INVESTMENT GAIN	12,682	11,054
NET INCOME (LOSS) AFTER TAXES	13,338	10,340
SURPLUS (CONSOLIDATED)	412,509	369,169
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	468,986	435,250
COMBINED RATIO, POST-DIVIDENDS (%)	93.6	95.4

Release: Immediate

Contacts:
Michael R. Murray (ISO)
201-469-2339
mmurray@iso.com

Joseph Annotti (PCI)
847-553-3604

Robert Hartwig (III)
212-346-5520