Insurers' Income and Surplus Rise Through Nine-Months 2005 Despite Record Catastrophe Losses

January 1, 2011 / 15 min read

JERSEY CITY, N.J., Dec. 27, 2005 — The U.S. property/casualty insurance industry's net income after taxes rose 4.4 percent, or $1.2 billion, to $28.8 billion in nine-months 2005 from $27.6 billion in nine-months 2004. Reflecting the industry's income, its consolidated surplus, or statutory net worth, increased 5.2 percent, or $20.4 billion, to $414.3 billion at September 30 from $393.8 billion at year-end 2004, according to ISO and the Property Casualty Insurers Association of America (PCI).

The industry's net income and surplus increased despite record catastrophe losses. Including losses from Hurricanes Dennis, Katrina, Ophelia and Rita, direct insured property losses due to catastrophes through nine-months 2005 totaled $47.6 billion — nearly double the $27 billion in direct insured property losses due to catastrophes through nine-months 2004, according to ISO's Property Claim Services (PCS) unit. Adjusting for losses covered by residual market mechanisms and foreign reinsurers, ISO estimates that private insurers' net catastrophe losses through nine-months 2005 totaled $27 billion to $32 billion — up from $15.8 billion through nine-months 2004.

Reflecting sharply higher net catastrophe losses, the industry suffered a $2.8 billion net loss on underwriting through nine-months 2005 — a $6.1 billion adverse swing from the $3.2 billion net gain on underwriting through nine-months 2004.

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

With the hurricanes in the first nine months of 2005 generating 2.3 million insurance claims, repairs to many properties not yet completed, and supply shortages leading to price increases that make it difficult to estimate repair costs, total insured losses from those storms could rise significantly in the months to come. But based on records back to 1949 and adjusting for inflation, direct losses from catastrophes through nine months have already risen to a new record high, with inflation-adjusted direct catastrophe losses through nine-months 2005 exceeding those through nine-months 1992, when Hurricane Andrew struck, by 57.9 percent.

"Given the massive catastrophe losses absorbed by insurers in nine-months 2005, the increase in income and surplus during the first three quarters of the year is a testament to the underlying financial health of the industry. But we can't afford to lose sight of the fact that, as bad as Hurricanes Katrina and Rita were, insurers and the public remain exposed to far more devastating catastrophes that could strain insurers' ability to fulfill their obligations to policyholders," said Gregory Heidrich, PCI senior vice president for policy development and research. "According to PCS, Hurricane Katrina caused a record $38.1 billion in direct insured losses to property. But catastrophe modeling by AIR Worldwide shows we face the prospect of hurricanes causing more than $100 billion in damage. Even as we applaud insurers' success coping with the catastrophes of 2005, we must do more to assure that insurers and the people they serve will survive when even more devastating storms strike."

"The other valuable lesson from the hurricanes of 2005 is that, as daunting as the prospect of a super-catastrophe is, severity is not the only issue," said John J. Kollar, ISO vice president for consulting and research. "There were five catastrophic hurricanes in 2004 and five more in 2005, including Wilma, and meteorological experts say we're in a cycle of increased storm activity that could last for decades. Sound risk management requires insurers to prepare for a sustained increase in the frequency of catastrophic storms. Insurers must take a hard look at their exposures, pricing, underwriting, reinsurance arrangements and the amount of capital they need to support the risk they take on."

Net investment income — primarily dividends from stocks and interest on bonds — grew 25.9 percent to $36.4 billion in nine-months 2005 from $29 billion in nine-months 2004. Insurers' investment income in nine-months 2005 benefited from $3.3 billion in one-time-only special dividends that one insurer received from an investment subsidiary. Excluding those special dividends, investment income rose 14.6 percent to $33.2 billion in nine-months 2005, as insurers' average holdings of cash and invested assets grew 9.8 percent and the annualized yield on cash and invested assets rose to 4.1 percent in nine-months 2005 from 4 percent in nine-months 2004.

Reflecting the deterioration in underwriting results consequent to the increase in catastrophe losses, the industry's annualized rate of return on average surplus declined to 9.5 percent in nine-months 2005 from 10.3 percent in nine-months 2004. Excluding $3.3 billion in special dividends one insurer received from an investment subsidiary, the industry's annualized return through nine-months 2005 was 8.5 percent — 0.2 percentage points less than average annualized return through nine months from the start of ISO's quarterly records in 1986 to 2004.

"The insurance industry's profitability and healthy surplus in the wake of record catastrophe losses through nine months may turn out to be good news for insurance buyers who have been bracing for possible rate increases," observed Heidrich. "With the price of insurance being determined by the law of supply and demand, and supply being determined by profitability and capacity, countrywide results through nine months may mean that rate increases could be largely limited to those lines and states directly affected by this year's hurricanes."

"But insurance markets are complex, and there is still substantial uncertainty about the ultimate cost of this year's hurricanes, the industry's true profitability through nine-months 2005 and pending developments in insurance markets," observed Kollar. "For example, reinsurers will bear ultimate responsibility for paying a disproportionate share of this year's hurricane losses, eating into their surplus and their capacity to provide reinsurance coverage to primary insurers. Ordinarily, this would lead to upward pressure on prices in primary insurance markets as primary carriers attempt to pass along increases in the cost of reinsurance. But, attracted by possible increases in the price of reinsurance, new capital is already flowing into the reinsurance business. The effect of that new capital on pricing going forward will depend on how aggressively it is deployed and on how the amount of new capital compares with the amount of capital destroyed by this year's catastrophes. But we won't know ultimate insured losses from the hurricanes of 2005 for quite some time, as a result of complexities ranging from coverage issues to the impact of demand surge on repair costs."

"Further complicating any assessment of the dynamics of reinsurance markets and how those dynamics will affect primary insurance markets, the unprecedented losses caused by this year's hurricanes may change insurers' perceptions of the amount of risk they've taken on and the amount of reinsurance they need," added Heidrich.

Pre-tax operating income — the sum of gains or losses on underwriting, net investment income and miscellaneous other income — climbed $2.5 billion, or 7.9 percent, to $34.3 billion in nine-months 2005 from $31.8 billion in nine-months 2004, as increases in net investment income more than offset deterioration in underwriting results. In addition, miscellaneous other income rose to $0.7 billion in nine-months 2005 from negative $0.4 billion in nine-months 2004.

Largely offsetting the $2.5 billion increase in pre-tax operating income, realized capital gains on investments declined $2.1 billion, or 32.6 percent, to $4.3 billion in nine-months 2005 from $6.4 billion in nine-months 2004.

The industry's federal income taxes fell $0.8 billion, or 7.6 percent, to $9.8 billion in the first nine months of 2005 from $10.6 billion in the first nine months of 2004.

Combining realized capital gains and net investment income, net investment gains rose $5.4 billion, or 15.3 percent, to $40.7 billion in the first nine months of 2005 from $35.3 billion in the first nine months of 2004.

The net loss on underwriting in nine-months 2005 amounts to 0.9 percent of the $309.9 billion in premiums earned during the period. The net gain on underwriting through nine-months 2004 amounted to 1.1 percent of the $308 billion in premiums earned during that period.

U.S. insurers' reported underwriting results through nine-months 2005 were affected by a transaction ceding $6 billion in premiums and loss and loss adjustment expenses from one insurer to its foreign parent. Based on reported results, overall net written premiums dropped $1.7 billion, or 0.5 percent, to $320.6 billion in nine-months 2005 from $322.3 billion in nine-months 2004. Net earned premiums increased $1.9 billion, or 0.6 percent, to $309.9 billion in nine-months 2005 from $308 billion in nine-months 2004. Net loss and loss adjustment expenses rose $5.3 billion, or 2.3 percent, to $229.6 billion in the first three quarters of 2005 from $224.3 billion in the first three quarters of 2004. Adjusted for this special transaction, net written premiums rose 1.3 percent, net earned premiums increased 2.5 percent, and net loss and loss adjustment expenses rose 5 percent.

At an adjusted 1.3 percent in 2005, nine-month net written premium growth slowed to a record low based on quarterly records back to 1986, with written premium growth slowing from 4.8 percent in nine-months 2004, 9.7 percent in nine-months 2003 and a cyclical peak of 13.8 in nine-months 2002. At an adjusted 2.5 percent in 2005, nine-month net earned premium growth dwindled to its slowest pace since the 1.5 percent increase in nine-months 1999 — down from 7.2 percent in nine-months 2004, 11.1 percent in nine-months 2003 and 11.4 percent in nine-months 2002.

Though overall net loss and loss adjustment expenses increased $5.3 billion to $229.6 billion in nine-months 2005, noncatastrophe net loss and loss adjustment expenses fell $8.4 billion, or 4 percent, to $200 billion in nine-months 2005 from $208.5 billion a year earlier. Adjusted for a special transaction that ceded $6 billion of one insurer's losses to its foreign parent, noncatastrophe loss and loss adjustment expenses fell $2.5 billion, or 1.2 percent, to $206 billion in nine-months 2005.

Other underwriting expenses — primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — rose $2.8 billion, or 3.5 percent, to $82.4 billion in the first nine months of 2005 from $79.7 billion in the first nine months of 2004.

Dividends to policyholders fell 8.4 percent to $753 million in nine-months 2005 from $822 million in nine-months 2004.

The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — rose 2.2 percentage points to 100 percent during the first nine months of 2005 from 97.8 percent a year earlier. Nonetheless, the combined ratio for nine-months 2005 was the second best combined ratio through nine months since the start of ISO's quarterly records in 1986, surpassed only by the combined ratio through nine-months 2004.

The $20.4 billion increase in the industry's consolidated surplus in nine-months 2005 compares with a $22.3 billion increase in nine-months 2004. The increase in surplus in nine-months 2005 consisted of $28.8 billion in net income after taxes and $6.3 billion in new funds paid in, less $0.4 billion in unrealized capital losses on investments, $9.6 billion in dividends to stockholders and $4.7 billion in miscellaneous charges against surplus.

The $0.4 billion in unrealized capital losses in nine-months 2005 constitutes a $2.2 billion adverse swing from the $1.8 billion in unrealized capital gains in nine-months 2004. Combining the $0.4 billion in unrealized capital losses in nine-months 2005 with the $4.3 billion in realized capital gains during the period, the industry posted $3.9 billion in overall capital gains during the first nine months of 2005, down from $8.2 billion during the first nine months of 2004.

The $6.3 billion in new funds paid in during nine-months 2005 is up 40.2 percent from the $4.5 billion in new funds paid in during nine-months 2004.

The $9.6 billion in dividends to stockholders in nine-months 2005 is up 8.5 percent from the $8.9 billion in dividends to stockholders in nine-months 2004.

The $4.7 billion in miscellaneous charges against surplus through nine-months 2005 compares with $2.7 billion in miscellaneous charges against surplus through nine-months 2004.

"Going forward, the outlook for investment income is mixed," added Kollar. "The Federal Reserve started raising interest rates on June 30, 2004, increasing its benchmark short-term interest rate 11 times for a total of 2.75 percentage points to 3.75 percent as of September 30, 2005. And the Federal Reserve has raised its benchmark rate twice since the end of September — on November 1 and December 13. With most economists expecting the Fed to continue raising rates, we have to expect insurers' yield on cash and invested assets to continue increasing for some time to come. But the slowdown in premium growth and payment of catastrophe claims could eat into cash and invested assets."

"The capital gains on investments through nine-months 2005 reflect developments in financial markets," noted Heidrich. "During the first nine months of this year, the S&P 500 rose 1.4 percent, and the New York Stock Exchange Composite rose 5.3 percent. With the S&P 500 increasing 3.2 percent from September 30 to December 22, the New York Stock Exchange Composite rising 2.6 percent, and other major market indicators also increasing since September, insurers' results for fourth-quarter 2005 will almost certainly benefit from market-driven capital gains on investments."

Third-Quarter Results

The industry's consolidated net income after taxes for third-quarter 2005 amounted to negative $2.1 billion, down $5.8 billion from positive $3.6 billion in third-quarter 2004. The industry's net income for third-quarter 2005 reflects the excess of $4.8 billion in pre-tax operating losses over $1.7 billion in realized capital gains and $1 billion in federal income tax credits.

The industry's third-quarter pre-tax operating losses of $4.8 billion compare with $3.4 billion in pre-tax operating gains in third-quarter 2004. Third-quarter 2005 operating losses consisted of $16 billion in net losses on underwriting, less $11.2 billion in net investment income and $0.1 billion in miscellaneous other income.

The $16 billion in net losses on underwriting in third-quarter 2005 is nearly three times the $6 billion in net losses on underwriting in third-quarter 2004. Underwriting results suffered from sharply higher catastrophe losses. Direct insured property losses due to catastrophes rose to $44.5 billion in third-quarter 2005 from $23.7 billion in third-quarter 2004, according to ISO's PCS unit. Adjusted for catastrophe losses covered by residual market mechanisms and foreign insurers, ISO estimates that private U.S. insurers' underwriting results for third-quarter 2005 included $24 billion to $29 billion in net losses from catastrophes — up from $12.5 billion in third-quarter 2004.

Third-quarter 2005 net losses on underwriting amount to 16 percent of the $100.5 billion in premiums earned during the period, up from 5.7 percent of the $105.3 billion in premiums earned during third-quarter 2004.

The industry's combined ratio deteriorated to 115.2 percent in third-quarter 2005 from 104.6 percent in third-quarter 2004. At 115.2 percent, the industry's third-quarter combined ratio had risen to its worst level since the 120.9 percent experienced in third-quarter 2001, when terrorists destroyed the World Trade Center.

Written premiums fell 6 percent to $103.3 billion in third-quarter 2005 from $109.8 billion in third-quarter 2004. Adjusted for $6 billion in premiums one insurer ceded to its foreign parent, written premiums declined 0.5 percent to $109.3 billion in third-quarter 2005, with third-quarter written premiums declining for the first time on record based on quarterly data back to 1986. The previous record low for third-quarter written premium growth was 1.4 percent in 1989. Prior to the decline in third-quarter 2005, growth in written premium slowed to 4.3 percent in third-quarter 2004 from 8 percent in third-quarter 2003 and a cyclical peak of 16.8 percent in third-quarter 2002.

Earned premiums fell 4.5 percent to $100.5 billion in third-quarter 2005 from $105.3 billion in third-quarter 2004. Excluding the same special transaction that affected written premiums, earned premiums increased 1.2 percent in third-quarter 2005.

Overall loss and loss adjustment expenses increased 5.6 percent to $88.9 billion in the third quarter of 2005 from $84.1 billion in the third quarter of 2004. Noncatastrophe loss and loss adjustment expenses fell 12.9 percent to $62.4 billion from $71.6 billion a year ago. Adjusted for the special transaction mentioned above, overall loss and loss adjustment expenses increased 12.7 percent and noncatastrophe loss and loss adjustment expenses fell 4.6 percent.

Other underwriting expenses rose 2.6 percent to $27.5 billion in the third-quarter 2005 from $26.8 billion in third-quarter 2004.

Dividends to policyholders dropped 26.5 percent to $0.2 billion in the third quarter of 2005 from $0.3 billion in the third quarter of 2004.

The $11.2 billion in net investment income is up 12.8 percent from $9.9 billion in the same period in 2004.

The $0.1 billion in miscellaneous other income is up from negative $0.5 billion in third-quarter 2004.

The $1.7 billion in realized capital gains is up 4.6 percent from the $1.6 billion in realized capital gains during the third quarter of 2004.

Combining net investment income and realized capital gains, the industry posted $12.9 billion in net investment gains in third-quarter 2005, up 11.7 percent from $11.5 billion a year earlier.

Unrealized capital gains on investments amounted to $5.2 billion in third-quarter 2005 — a $6.9 billion positive swing from the $1.7 billion in unrealized capital losses on investments in third-quarter 2004.

Combining realized and unrealized capital gains, the industry enjoyed $6.8 billion in total capital gains in third-quarter 2005, in contrast to the $0.1 billion in total capital losses it suffered in third-quarter 2004.

OPERATING RESULTS FOR 2005 and 2004 ($ Millions)
NINE MONTHS	2005	2004
NET WRITTEN PREMIUM	320,622	322,337
NET EARNED PREMIUM	309,926	308,040
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	229,563	224,302
STATUTORY UNDERWRITING GAIN (LOSS)	(2,074)	4,060
POLICYHOLDERS' DIVIDENDS	753	822
NET UNDERWRITING GAIN (LOSS)	(2,828)	3,238
PRE-TAX OPERATING INCOME	34,304	31,806
NET INVESTMENT INCOME EARNED	36,445	28,956
NET REALIZED CAPITAL GAIN (LOSS)	4,296	6,376
NET INVESTMENT GAIN	40,741	35,332
NET INCOME (LOSS) AFTER TAXES	28,787	27,567
SURPLUS (CONSOLIDATED)	414,264	369,324
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	497,966	455,392
COMBINED RATIO, POST-DIVIDENDS (%)	100.0	97.8
THIRD QUARTER	2005	2004
NET WRITTEN PREMIUM	103,295	109,839
NET EARNED PREMIUM	100,550	105,259
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	88,859	84,112
STATUTORY UNDERWRITING GAIN (LOSS)	(15,830)	(5,682)
POLICYHOLDERS' DIVIDENDS	216	294
NET UNDERWRITING GAIN (LOSS)	(16,046)	(5,976)
PRE-TAX OPERATING INCOME	(4,802)	3,400
NET INVESTMENT INCOME EARNED	11,188	9,916
NET REALIZED CAPITAL GAIN (LOSS)	1,680	1,606
NET INVESTMENT GAIN	12,869	11,523
NET INCOME (LOSS) AFTER TAXES	(2,138)	3,619
SURPLUS (CONSOLIDATED)	414,264	369,324
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	497,966	455,392
COMBINED RATIO, POST-DIVIDENDS (%)	115.2	104.6

Release: Immediate

Contacts:
Michael R. Murray (ISO)
201-469-2339
mmurray@iso.com

Joseph Annotti (PCI)
847-553-3604

Loretta Worters (III)
212-346-5500