Best Reports P/C Industry Maintains Underwriting Profit, Despite “Unprecedented Cat Events”

December 28, 2004

A.M. Best Co. has released a year-end report on the U.S. P/C industry, which indicates that, “despite the colossal hurricane losses posted during the third quarter of 2004,” it “reported very strong nine-month 2004 operating results, propelled by underwriting income of an estimated $3.4 billion.”

The report was prepared before the massive tidal waves in the Indian Ocean, but most analysts agree that these will have a limited impact on the U.S. P/C industry.

“The industry’s ability to sustain an underwriting profit in light of such heavy catastrophe activity highlights the strong underwriting fundamentals present since 2001,” Best reported. “Specifically, compounded annual rate increases have resulted in an influx of earned premiums from prior policy periods, and stringent underwriting standards have slowed the pace of growing loss costs.”

Without the Cat losses 2004 would have been a very spectacular year for the industry. It had already recorded $9 billion in underwriting income as of June 30, but then came the disasters in August and September, which Best noted reduced this figure significantly. However, “the industry’s year-to-date underwriting performance demonstrates sustained progress over the $5.2 billion underwriting loss reported for the comparable nine-month period of 2003 and an even more pronounced gain over the $19 billion underwriting loss reported for the first nine months of 2002,” said Best.

Discussing those third quarter losses, Best noted that according to the Insurance Services Office Inc.’s Property Claim Services unit, “these four hurricanes caused preliminary insured losses of $20.5 billion, of which A.M. Best Co. estimates 55 percent to 70 percent was incurred by U.S. insurers. The remainder of the hurricane losses were absorbed by the Florida Hurricane Catastrophe Fund, Citizens Property Insurance Co., non-U.S. reinsurers and the Federal Emergency Management Agency, as well as other governmental agencies.”

The rating agency said “the hurricane losses contributed to the worst-ever third-quarter property catastrophe loss reported by the industry.” However, it also noted that despite those losses, “solid underwriting results and improved investment income were leading factors in the industry’s reported pretax operating income of nearly $32.4 billion as of nine-month 2004 results, which is a 38.5 percent increase over the comparable period of 2003.” In addition Best said that the industry’s combined ratio improved 2.2 points — to 97.8 — from 100 in 2003. “However, the third-quarter combined ratio of 104.2 represents a 10.9-point and an 8.5-point deterioration compared with the first and second quarters of 2004, respectively.

“The industry’s continued improvement in the combined ratio — a key measure of underwriting profitability — was driven by a 2.5-point decline in the loss and loss-adjustment expense ratio, which offset a 0.3-point increase in the expense-plus-policyholder-dividend ratio. The industry’s combined ratio declined despite an absolute dollar increase in pure losses over the comparable period 2003. What is keeping the industry’s combined ratio below 100 is clearly the surge in earned premiums, which increased an estimated 7.4 percent over the prior year.”

Best also said it foresees this phenomenon continuing into 2005, “as premiums will earn on the rate increases applied during prior pricing periods. However, it is not sustainable given the noticeable gap between the percentage increases in net written premiums vs. net premiums earned, which highlights the reduction in premium writings that will affect earned premium results in 2006.”

Overall Best’s report indicates that the “industry’s operating performance measured by return on revenue improved to a healthy 10.3 percent as of nine-month 2004 results, up from 8 percent in the comparable 2003 period. However, operating results moderated from the 13.8 percent return on revenue reported for the first six months of 2004 due to reduced underwriting income. Net investment income improved moderately by 3.7 percent over the comparable 2003 period, as insurers had more invested assets to draw upon for income due to increased operating cash flow.”

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