Absence of hurricane losses proves beneficial to insurers’ bottomline

News Currents

Driven by a sharp decline in catastrophe losses from hurricanes and other natural disasters in 2006, the U.S. property/casualty industry posted a $24.4 billion net gain on underwriting through nine months. The net gain on underwriting through nine-months 2006 stands in stark contrast to the $2.5 billion net loss on underwriting through nine-months 2005.

The industry’s positive underwriting results contributed to an increase in its net income after taxes to $44.9 billion in nine-months 2006 from $29.7 billion in nine-months 2005. Reflecting the increase in net income after taxes, the industry’s annualized rate of return on average policyholders’ surplus (net worth) rose to 13.4 percent in nine-months 2006 from 9.8 percent in nine-months 2005, according to ISO and the Property Casualty Insurers Association of America (PCI).

The figures are consolidated estimates for all private property/casualty insurers based on reports accounting for at least 96 percent of all business written by private U.S. property/casualty insurers.

Catastrophe Losses

According to ISO’s Property Claim Services (PCS) unit, direct insured losses from catastrophes dropped to $7.6 billion in nine-months 2006 from $51.1 billion in nine-months 2005.

“Much of the improvement in insurers’ underwriting and overall results is attributable to the decline in catastrophe losses from the record level experienced in nine-months 2005, as Hurricanes Katrina and Rita slammed into the Gulf Coast,” noted Michael R. Murray, ISO assistant vice president for financial analysis. “Allowing for losses from Katrina and Rita that didn’t emerge until after insurers closed their books for nine-months 2005 and factoring out losses covered by residual market insurers, the Florida Hurricane Catastrophe Fund and foreign insurers, ISO estimates the catastrophe losses included in private U.S. insurers’ net financial results declined by $17.3 billion to $10.1 billion in nine-months 2006 from $27.5 billion in nine-months 2005. ISO also estimates that catastrophe-related net loss adjustment expenses declined to $0.5 billion in nine-months 2006 from $0.9 billion in nine-months 2005, contributing another $0.4 billion to the improvement in underwriting results.”

“While the fact that no major hurricanes hit the U.S. in 2006 was certainly good news for the millions of consumers still recovering from the devastating impact of the 2004 and 2005 storm seasons, we view this development as an anomaly rather than a trend,” said Genio Staranczak, PCI’s chief economist. “Natural catastrophes still pose a huge threat to consumers and businesses along the Gulf and Atlantic Coasts. The industry, state and federal governments, private businesses and individuals must continue to better prepare themselves by ensuring that financial reserves are adequate, strengthening building codes and land use regulations, and putting in place catastrophe recovery plans to speed relief to those who need it after a disaster occurs.”

ISO and the PCI noted that modeling by AIR Worldwide indicates that hurricanes causing $100 billion or more insured losses are a very real possibility and that large population centers in the West and Midwest face the prospect of a major earthquake.

Underwriting results

The improvement in underwriting results in nine-months 2006 reflects both growth in premiums and a decline in loss and loss adjustment expenses.

Net written premiums climbed $16.5 billion to $337.8 billion in nine-months 2006 from $321.3 billion in nine-months 2005, with written premium growth accelerating to 5.1 percent in nine-months 2006 from negative 0.2 percent in nine-months 2005. Net earned premiums rose $14.9 billion to $325.4 billion in nine-months 2006 from $310.5 billion in nine-months 2005, with earned premium growth accelerating to 4.8 percent in nine-months 2006 from 0.8 percent in nine-months 2005.

Overall loss and loss adjustment expenses declined $17.9 billion, or 7.8 percent, to $212.2 billion in nine-months 2006 from $230 billion in nine-months 2005. Non-catastrophe loss and loss adjustment expenses declined $0.1 billion, or 0.1 percent, to $201.5 billion in nine-months 2006 from $201.6 billion a year earlier.

Other underwriting expenses rose $5.5 billion, or 6.7 percent, to $87.7 billion in the first three quarters of this year from $82.2 billion in the first three quarters of last year.

Dividends to policyholders rose 47.1 percent to $1.1 billion in nine-months 2006 from $0.7 billion in nine-months 2005.

The net gain on underwriting in nine-months 2006 amounts to 7.5 percent of the $325.4 billion in premiums earned during the period, whereas the net loss on underwriting in nine-months 2005 amounted to 0.8 percent of the $310.5 billion in premiums earned during that period.

Combined ratio

The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved 8.4 percentage points to 91.5 percent in the first three quarters of 2006 from 99.9 percent in the first three quarters of 2005.

Last year, one insurer ceded $6 billion in premiums and the same amount of loss and loss adjustment expenses to its foreign parent. And earlier this year, one insurer stopped reporting as a property/casualty insurer and began instead reporting as a health insurer. If not for those developments, industry written premiums would have increased 3.8 percent in nine-months 2006, and loss and loss adjustment expenses would have declined 9.4 percent.

“At an adjusted 3.8 percent, written premium growth in nine-months 2006 fell far short of growth in the economy,” added Murray. “U.S. gross domestic product (GDP) rose 6.6 percent in the first three quarters of 2006 compared with its level a year earlier. That premiums rose only about half as much as GDP is an indication that insurers’ recent results are spurring competition.”

Topics Catastrophe Carriers USA Natural Disasters Profit Loss Underwriting Property Hurricane Property Casualty Casualty