US$5-billion underwriting loss for U.S. P/C industry in 2005

The U.S. property and casualty industry reported a US$5-billion underwriting loss and a combined ratio of 100.9% in 2005, according to a recent study by rating agency A.M. Best.The result represents a US$10.5-billion reversal from 2004’s underwriting profit, and a deterioration of 2.4 points from the industry’s 2004 combined ratio of 98.5%. “The underwriting loss resulted from US$57.7 billion in catastrophe losses primarily from a record-breaking hurricane season,” A,M, Best said of its study.”Catastrophe losses in 2005 added an estimated eight points to the industry’s combined ratio, double the point increase seen in calendar year 2004,” A.M. Best noted in a press release. “Interestingly, when catastrophe losses are excluded, the combined ratios for 2005 and 2004 both would be profitable at a 92.9% and 94.5%, respectively, further underscoring the resilience of the industry.”As well, the increase in the industry’s combined ratio resulted from the reported 144.8% combined ratio of the reinsurance segment. “The segment was impacted significantly not only by the frequency and severity of the 2005 hurricane season, but also by a number of one-time transactions that skewed the performance of the segment.”Results in the personal lines segment deteriorated modestly by 2.8 points in 2005, A.M. Best noted, as the year-end combined ratio increased to 97.7% from 94.9% at year-end 2004. “Despite record hurricane losses, the commercial lines segment reaped the benefits of several years of increasing rates and reported a combined ratio of 99.4%,” A.M. Best reported. “This marked a 0.8-point improvement over 2004, even though catastrophe losses for 2005 increased 3.1 points compared to 2004.A.M. Best further noted the “slight” deterioration of 0.1% in the industry’s operating ratio to 88.8% was offset by a favorable increase in net investment ratio (net investment income as a percent of net premiums earned). The increase in the net investment ratio resulted from positive operating cash flows.”Overall, despite absorbing record-high hurricane losses resulting in an underwriting loss, the resilience and profitability of the industry is apparent from its reported 88.8% operating ratio,” the A.M. Best study concludes. “Although the industry reported an underwriting loss, it performed much better than expected. Excluding record-high hurricane losses, the underwriting results were strong, illustrating the fundamental strength of the industry as a whole.”