U.S. insurers post record profit in first-half 2004

U.S. property & casualty insurers turned in a record performance in the first six months of 2004, with net income hitting US$23.5 billion, policyholder surplus reaching $370.4 billion, according to data released by the Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI).This year’s strong performance well outpaces the first half of 2003, when net income was US$14.5 billion and surplus stood at US$312.5 billion.Gains were made on the underwriting side in the first half of this year, with the industry posting an underwriting profit of US$9.0 billion on a combined ratio of 94.4%, compared to an underwriting loss of $2.7 billion on a combined ratio of 99.8% in the first half of 2003.The pace of premium growth slackened, with net written premiums up just 4.6% to US$212.1 billion from US$202.8 billion the year prior. This compares with 11% premium growth in the first half of 2003. Net earned premiums were up 6.6% to US$202.6 billion in the first half of 2004 from US$190.0 billion the year prior. In the first half of 2003, earned premium growth was almost double at 12.3%.Investments also played a role in the industry’s strong performance, with net investment gains in the first half of this year at US$24.0 billion (including net realized gains of US$5.0 billion), compared to investment gains of US$22.8 billion (including realized gains of US$4.5 billion) in the first half last year.However, ISO vice president John J. Kollar cautions against too much optimism based on the first-half results. Industry profitability is already inciting price competition, he warns. “ISO MarketWatch data show that actual rate changes on renewals for commercial insurance policies turned positive in mid-1999 and gained momentum through July 2002, when they peaked at 12.9%,” he notes. “But since then, rate changes on renewals dwindled to just 3.7% in March 2004 less than a third of what they were at their peak.”The industry will also have to deal with the catastrophe losses still pouring in as a result of hurricanes Charley, Frances, Ivan and Jeanne, which are currently estimated to total US$22-26 billion, adds PCI assistant vice president Roger Kenney. But the murkiest picture of all may be the investment markets. The S&P 500 rose just 2.6% in the first half of 2004, compared to 10.8% a year earlier, and in the third quarter the index actually dropped 2.3%. In the second quarter of 2004, insurers’ realized capital gains dropped off sharply compared to 2003, down to US$1.6 billion this year from US$3.4 billion a year ago. Kollar predicts nine-month results for realized gains to be well below last year’s levels.And, adds Kenney, the lack of recovery in investment yields despite successive interest rate hikes, coupled with softening rates cutting into underwriting cash flows, could signal weakening investment results moving forward.