U.S. Insurers Post Strong Underwriting Gain for First Half

U.S. insurers posted an impressive US$9 billion underwriting profit for the first six months of 2004 compared with a loss of US$2.7 billion reported for the same period the year prior, according to industry data compiled by rating agency A.M. Best. Insurers lifted net income for the first six months of this year by more than 50% to US$23.6 billion versus the US$15.5 billion disclosed for the same period in 2003, the rating agency notes.

Much of the profit gain made by insurers resulted from improved underwriting, with the industry pulling back its average combined ratio for the first half of this year to 94.5% against the 99.7% ratio shown at the 2003 half-year mark (insurers posted a 105.1% combined ratio for the first half of 2002).

The turning of the market cycle was clearly evident in mid-year results, A.M. Best points out. The period saw net written premiums rise 4.6% year-on-year to US$216.8 billion (June 2003: US$207.3 billion) – this compares with annual premium growth of 12.9% between first-half 2002 and 2003. The industry’s net earned premiums grew by 6.7% to US$207.0 billion for the latest six month period from the US$193.9 billion reported for the same period last year.

The industry’s loss ratio dropped by 5.4 percentage points for the first six months of this year to 69.5% from the 74.9% ratio shown a year ago. Insurers also benefited from improved investment conditions, with the industry’s net investment income for the latest reporting period clocking in at US$19.4 billion versus the US$18.9 billion reported 12 months prior. However, realized capital gains declined marginally for the first six months of 2004 to US$4.3 billion (June 2003: US$4.5 billion).

A.M. Best says that the most significant change in the financial position of insurers is the dramatic growth in industry surplus achieved over the first half of 2004. The industry surplus at the end of June this year stood at US$379.2 billion compared with the US$318.3 billion reported a year ago (the latest gain also shows a 6.6% increase in surplus since the end of 2003).

However, the rating agency remains cautious of market conditions, noting that the latest six month financial result does not take into account the devastating loss impact anticipated from hurricanes Charley, Frances and Ivan. Thus far, 2004 had proven to be a relatively low catastrophe year, the rating agency observes, with just US$2.69 billion in insured losses (as calculated by the U.S.-based Insurance Services Office (ISO)). The combined impact of the three third-quarter hurricanes could well reach US$20 billion.

Furthermore, A.M. Best notes, the second half of this year should see insurers taking additional reserve charges, specifically for asbestos and environmental claims. “Based on A.M. Best’s preliminary findings, the industry’s A&E reserves are under-funded by an estimated US$39 billion, and it is likely that A&E charges will impact results during the second half of 2004. Despite considerable increases in A&E reserves during the past three years, several of the 30 most exposed companies in the industry have not completed ground-up studies of their asbestos and environmental exposures.”