Jersey City, N.J. - Despite slowing premium growth and a deluge of catastrophic losses, property and casualty insurers ended a 26-year drought by posting $5 billion net underwriting profit in 2004, according to Insurance Services Office (ISO), Jersey, City, N.J. Powered by the best underwriting results in almost three decades, insurers' net income after taxes and overall profitability rose for the third consecutive year, and insurers' surplus climbed to a record high, according to ISO's newly-published insurance issues series study "Insurer Financial Results: 2004."
Insurers' net income after taxes rose to $38.7 billion in 2004 from $30.0 billion in 2003, as their GAAP rate of return on average net worth climbed to 9.4 percent last year from 8.9 percent and surplus jumped to $393.5 billion from $347 billion. Improvement in underwriting results drove the $8.7 billion increase in net income, with the $5 billion net gain on underwriting in 2004 constituting a $9.9 billion positive swing from the $4.9 billion net loss on underwriting in 2003.
"Insurers' impressive underwriting results for 2004 reflect the firming in insurance markets that began in mid-1999 and gathered momentum through mid-2002. But premium growth slowed in 2004 as a result of conditions in insurance markets, raising serious questions about underwriting profitability going forward," said Carole J. Banfield, ISO executive vice president - Information Services. "And, with today's investment yields, underwriting results must be better than they used to be for insurers to achieve any given overall rate of return," added Banfield.
Insurers' GAAP rate of return last exceeded 15 percent in 1987, when it was 17.3 percent even though the combined ratio -- a key measure of losses and other underwriting expenses per dollar of premium -- was 104.6 percent. Achieving a 17.3 percent rate of return with investment results, tax rates and financial leverage like those in 2004 would require that the combined ratio improve to about 88 percent -- roughly 17 percentage points better than the combined ratio for 1987 and about 10 percentage points better than the 98.1 percent combined ratio for 2004.
"The other reason insurers didn't celebrate their results for 2004 with champagne and fireworks is that, even though their rate of return rose to its highest level since 1997, it remained low compared with long-terms norms and the rates of return earned by firms in other industries," observed Banfield.
Insurers' 9.4 percent rate of return for 2004 was 0.5 percentage points less than their average rate of return from 1971 to 2003. And the median GAAP rate of return for the Fortune 500 in 2004 was 14.9 percent -- 5.5 percentage points more than the GAAP rate of return for the insurance industry and 4.8 percentage points more than the 10.1 percent rate of return for large insurers.
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