The property/casualty industry continued to build on the operating momentum achieved during 2003, as the industry reported an underwriting gain during the first quarter of 2004. Further, very strong operating results and favorable equity-market conditions boosted the industry’s surplus beyond the record levels achieved at year-end 2003, according to an A.M. Best Co. special report.
According to the report, the continued generation of operating profits certainly is welcomed after several years of pricing increases that for some time were eroded by adverse loss-reserve development, high reinsurance costs and reductions of investment income, before they could reach the bottom line in the form of profits.
A.M. Best believes that the biggest challenge facing insurers will be to maintain market discipline in light of flattening premium rates and increased surplus levels. To stir the pot, the trend of premium growth derived through rate increases continued to decelerate, as net premium writings increased at a significantly reduced level when compared with the first quarter of 2003.
Nevertheless, the combined ratio improved by an estimated 6.4 points to 93.3 in 2004, from 99.7 in 2003, signifying the most profitable quarterly underwriting result in the recent five-year period. Total favorable loss-reserve development reported at nearly $1.8 billion; relatively moderate catastrophe losses; and persisting impacts of rate increases that are fully earning through insurers’ income statements all propelled underwriting results.
As was the case during the last three reporting periods of 2003, net premiums increased at a reduced rate, reflecting the industry’s current status along the downward trough of the pricing cycle. The magnitude of the rate flattening is evident, as A.M. Best Co. data show that net premiums written rose approximately 6.6 percent during the quarter, a sharp decline when compared with the 12.9 percent and 9.0 percent increases reported for the first quarter and year-end 2003, respectively.
While there are indications that rates are softening in certain segments such as commercial property and personal automobile business lines, the benefits of tighter underwriting terms and conditions continue to be key drivers in the industry’s strong underwriting results. Market dynamics, such as competitors’ withdrawals during the past several years, along with varying economic factors, continue to fuel the demand for capacity in certain market segments. Nonetheless, murmurs of competitive forces are emerging within the U.S. property/casualty market.
Surplus during the first quarter increased by nearly $13 billion from year-end 2003, as net income and unrealized capital gains were tempered somewhat by a reduction in contributed capital and an increase in stockholder dividends.