Stellar first-half could be dampened by storms: III

Despite a strong performance by the U.S. property & casualty insurance industry in the first half of 2004, these results will likely be all but wiped out by the spate of hurricanes hitting the southeastern U.S. this fall, notes Robert Hartwig, chief economist for the Insurance Information Institute (III).In his analysis of first-half results, Hartwig highlights the impressive profit produced by the industry US$23.5 billion after tax and notes that with an expected price tag from the Atlantic hurricane season of US$22-$27 billion, these profits will quickly disappear. And the weather is not the only disaster dampening industry spirits, he adds. The just-announced charges by New York Attorney General Eliot Spitzer against Marsh, resulting from his probe into broker commissions, has already cost the industry millions in lost capitalization as investors dumped insurer and broker stocks in response.Also pointing toward a lackluster second half are the signs of pricing slowdown. “The first half combined ratio of 94.4% proves just how serious insurers had become about improving underwriting and implementing risk-appropriate pricing, but likely marks the zenith in underwriting performance for the current cycle,” Hartwig speculates. Slow net premium growth of 4.6% compared to overall economic growth of 6.9% during the first half of 2004 indicates the industry could see a negative real growth situation by the end of 2004 or early 2005, he says. At the same time, the industry is reporting record surplus of US$370.4 billion for the first half of 2004. However, while surplus has grown just 9.2% since 1999, the U.S. economy has grown about 25% during that time, Hartwig notes. Those who claim the industry is “rolling in dough” should bear in mind that industry’s capital is stretched much more thinly than it was prior to the latest hard market, and this does not even take into account the proliferation of new risks terrorism, mold, medical malpractice and corporate governance, for example.The industry is showing some positive signs, with price competition not yet “destructive” and term and conditions remaining “relatively firm”, according to Hartwig. “The fact that the industry’s average return on surplus is an estimated 13.1%, despite a combined ratio of just 94.4% during the first half, is a stark reminder that a renewed commitment to underwriting and pricing discipline are needed if the industry hopes to maintain Fortune 500 rates in 2005.”