The U.S. property/casualty industry’s net income after taxes rose to $13.3 billion in first-quarter 2004 from $6.5 billion in first-quarter 2003 as insurers posted an underwriting profit for only the second time since the start of quarterly data going back to 1986. But growth in net written premiums slowed to 4.5 percent versus year-ago levels in first-quarter 2004 from 12.7 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 resurgent competition suggest insurers’ earnings are approaching a cyclical peak, according to ISO and the Property Casualty Insurers Association of America (PCI).
Improvement in underwriting results drove the $6.8 billion increase in the industry’s net income, with insurers’ $5.4 billion in net gains on underwriting in first-quarter 2004 constituting a $6.9 billion positive swing from their $1.5 billion in net losses on underwriting in first-quarter 2003. 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 $2.4 billion, or 23 percent, to $12.8 billion in first-quarter 2004 from $10.4 billion in first-quarter 2003.
These positive developments were partially offset by a decline in miscellaneous other income and an increase in federal income taxes. Other income dropped to $0.1 billion in first-quarter 2004 from $0.2 billion in first-quarter 2003. Federal income taxes rose to $4.9 billion the first quarter of 2004 from $2.5 billion a year earlier.
“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 percent, and we are already seeing signs of an escalation of competition that threatens to undermine insurers’ profitability going forward,” John Kollar, ISO vice president for consulting and research, said. “Written premium growth peaked at 16.8 percent in the third quarter of 2002 and has since dwindled to less than a third of that. Consistent with this, ISO MarketWatch data show that premium rate increases for commercial lines policies peaked at 12.9 percent in July 2002 and have been losing momentum ever since, falling to just 4.9 percent in December 2003. And a recent market survey by the Risk and Insurance Management Society (RIMS) indicates that rates are now declining for both commercial property and general liability policies.”
“Government economic data also suggest that competition in insurance markets is intensifying,” Roger Kenney, PCI assistant vice president for research, added. “Premium growth slowed to 4.5 percent versus year-ago levels in first-quarter 2004 from 12.7 percent in first-quarter 2003 even though growth in current dollar GDP — gross domestic product — accelerated to 6.7 percent from 3.9 percent. The spread between premium growth and economic growth, which was positive a year ago, is now negative,” added Kenney.
The ISO and PCI industry figures are consolidated estimates for all private property/casualty insurers based on the reports of insurers that account for 96 percent of all business written by private U.S. property/casualty insurers.
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 $4.5 billion, or 4.5 percent, to $106 billion in first-quarter 2004 from $101.4 billion in first-quarter 2003. Net earned premiums rose $6.7 billion, or 7.1 percent, to $100.3 billion in first-quarter 2004 from $93.6 billion a year earlier.
Overall loss and loss-adjustment expenses decreased $1.7 billion, or 2.4 percent, to $68.4 billion in first-quarter 2004 from $70.1 billion in first-quarter 2003. Catastrophe losses fell $0.4 billion, or 29.8 percent, to $1 billion in first-quarter 2004 from $1.5 billion in first-quarter 2003, according to ISO’s Property Claim Services unit. Non-catastrophe loss and loss-adjustment expenses also fell, dropping $1.2 billion, or 1.8 percent, to $67.4 billion in the first three months of 2004 from $68.6 billion in the first three months of 2003.
Other underwriting expenses (primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes) rose $1.5 billion, or 6.1 percent, to $26.3 billion in first-quarter 2004 from $24.8 billion a year earlier.
Dividends to policyholders fell $46 million, or 13.8 percent, to $0.3 billion in first-quarter 2004.
The net gain on underwriting in first-quarter 2004 amounts to 5.3 percent of the premiums earned during the quarter. This contrasts with net losses on underwriting in first-quarter 2003 amounting to 1.6 percent of the premiums earned during that period.
The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved 6.3 percentage points to 93.3 percent in first-quarter 2004 from 99.6 percent in the corresponding quarter of 2003.
“Benefiting from past rate increases and a decline in loss and loss-adjustment expenses, first-quarter 2004 underwriting results were truly remarkable. Based on quarterly data going back to 1986, the 93.3 combined ratio for first-quarter 2004 is more than six full points better than the previous record — the 99.5 for fourth-quarter 2003. And with $1.5 billion in second-quarter catastrophe losses through June 25 versus $5.1 billion in catastrophe losses in second-quarter 2003, we have reason to believe that second-quarter underwriting results may be even better than first-quarter underwriting results,” Kenney remarked. “But one has to wonder how long underwriting will remain profitable. 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.”
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 $7 billion to $14.9 billion in first-quarter 2004 from $7.8 billion in first-quarter 2003.
The industry’s net investment gains for first-quarter 2004 consisted of $9.4 billion in net investment income and $3.4 billion in realized capital gains on investments. Net investment income was up $0.2 billion, or 2.1 percent, from $9.2 billion in first-quarter 2003. Realized capital gains rose $2.2 billion from $1.2 billion in first-quarter 2003.
The modest growth in the industry’s investment income is the net result of an increase in insurers’ holdings of invested assets and a decline in the yield on those assets. Insurers’ average holdings of cash and invested assets rose 13.9 percent to $950.2 billion in first-quarter 2004 from $834.2 billion in first-quarter 2003, but the annualized yield on those assets fell 10.4 percent.
Prospectively, the outlook for investment income is mixed. Recent and projected increases in market interest rates should eventually lead to increases in investment yields, but resurgent competition in insurance markets could undermine the underwriting cash flows that have fueled growth in cash and invested assets. Whether investment income will continue increasing depends on whether increases in interest rates boost investment yields faster than competition eats into cash flows.
Largely reflecting the $13.3 billion in net income in first-quarter 2004, the industry’s consolidated surplus — its assets minus its liabilities — rose $14.2 billion, or 4.1 percent, to $361.2 billion at March 31, 2004, from $347 billion at December 31, 2003. Other additions to surplus in first-quarter 2004 included $2.9 billion in unrealized capital gains on investments and $0.5 billion in new funds paid in. Deductions from surplus in first-quarter 2004 included $0.6 billion in miscellaneous charges against surplus and $2 billion in dividends to shareholders.
Insurers’ $2.9 billion in unrealized capital gains on investments in first-quarter 2004 compare with $1.9 billion in unrealized capital losses in first-quarter 2003. Combining realized and unrealized capital gains, insurers posted $6.3 billion in overall capital gains in first-quarter 2004 — a $7 billion positive swing from the $0.7 billion in overall capital losses in first-quarter 2003.
Insurers’ prospects for further capital gains depend on developments in stock markets. Since the end of the first quarter, stock markets have moved little, with the S&P 500 being up 0.7 percent and the New York Stock Exchange Composite being down 0.4 percent, as of June 25. This suggests insurers will see little in terms of capital gains or losses on stocks until stock markets move more definitively.
The $0.5 billion in new capital raised by insurers in first-quarter 2004 is more than twice the $0.2 billion raised in first-quarter 2003.
The $0.6 billion in miscellaneous charges against surplus in first-quarter 2004 compare with $1 billion in miscellaneous additions to surplus in first-quarter 2003.
The $2 billion in dividends to shareholders in first-quarter 2004 is up $0.1 billion, or 4.2 percent, from $1.9 billion in first-quarter 2003.
“On balance, the property/casualty industry’s recent results provide ample reasons to congratulate insurers for the progress they’ve made in recovering from more than a decade of poor underwriting results, $35.7 billion in capital losses during the three years ending 2002, and the financial effects of the tragic events on September 11, 2001. But there are also ample reasons to question the sustainability of that progress,” Kollar added.
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