U.S. Reinsurer Income Drops for First Half 2004

U.S. reinsurers saw net income for the first six months of this year drop slightly to US$2.56 billion compared with the US$2.59 billion reported for the same period the year prior, according to financial data compiled by the Reinsurance Association of America (RAA). While the association’s results point to a decline in profitability of the sector, the first glance impression of the numbers is misleading – the number of RAA member reinsurers declined to 27 companies in calculating the latest 2004 result, whereas there were 30 companies included in last year’s numbers.

Another reason for the moderate decline witnessed in the U.S. reinsurance sector’s net income is reduced premiums levels. Reinsurers’ gross written premiums for the first six months of this year came in at US$22.21 billion (June 2003: US$24.65 billion) while net earned premiums clocked in at US$14.27 billion (June 2003: US$15.18 billion).

However, reinsurers did achieve improvement in reduced underwriting costs and lower expenses. The sector’s overall combined ratio for the first half of this year came in at 96.3% against the 97.9% ratio reported a year ago. The result saw an underwriting profit of US$336.66 million for the first half of 2004, more than triple the underwriting profit of US$73.70 million produced for the first half of 2003. At the same time, reinsurers’ expense ratio for the latest six months dropped to 25.5% versus the 26.6% ratio shown at the end of June last year.

Reinsurers’ investment income for the latest reporting period came in at US$2.3 billion compared with US$2.5 billion disclosed a year ago. Net realized gains for the latest reporting period fell dramatically year-on-year to US$796.8 million from the US$1.6 billion produced for the first half of 2003. At the end of June 2004, the sector’s overall policyholder surplus stood at US$55.9 billion, showing a 25% year-on-year gain on the up from US$44.7 billion shown at the end of June 2003.

Globally, reinsurers caught the eye of rating agencies, with Fitch, Moody’s and A.M. Best all revising their outlooks on the sector to “stable” from “negative”. Fitch expects the global reinsurance sector to produce a combined ratio in the area of 97% for 2004. But, the rating agencies remain concerned over the significant “gap” in the recoverability expectations of primary insurers and their reinsurance counterparts.