SOUND RISK MANAGEMENT AND
STRONG INVESTMENT RESULTS ENABLED INSURANCE INDUSTRY TO WEATHER RECORD
CATASTROPHE LOSSES IN 2005
Net income and surplus increased even
though direct insured property losses due to catastrophes rose in 2005 to a
record $57.7 billion — more than double the $27.5 billion in direct insured
property losses due to catastrophes in 2004, according to ISO’s Property Claim
Services (PCS) unit. Figures for catastrophe losses exclude those covered by
the National Flood Insurance Program.
“But countrywide data for all lines
often masks significant problems in specific markets and locations,” said
Michael R. Murray, ISO assistant vice president for financial analysis. “For
example, before reinsurance recoveries and excluding losses covered by residual
market mechanisms, the hurricanes of 2005 caused $24.7 billion in insured
losses to residential and commercial property in Louisiana — $3.1 billion more
than all the premiums insurers charged for property insurance in the state
during the 23 years from 1982 to 2004. Similarly, in
“And, unfortunately, hurricane and
severe weather experts are predicting another very active hurricane season,”
said Gregory Heidrich, PCI senior vice president for
policy development and research. “The latest predictions indicate a very high
probability, 80 percent or more, of a major hurricane — a category 3, 4 or 5
storm — hitting the
These consolidated industry results
are estimates for all private property/casualty insurers based on reports
accounting for at least 96 percent of all business written by private
“The insurance industry’s financial
results for 2005 attest to insurers’ risk management and, in particular, their
use of reinsurance to spread risk globally. For example, Lloyd’s of London
recently reported that it had received $5.7 billion in claims from the
hurricanes that struck the
Adjusting for losses covered by
foreign reinsurers, residual market mechanisms and
the Florida Hurricane Catastrophe Fund, ISO estimates that private insurers’
financial results for 2005 included net catastrophe losses totaling $31 billion
to $36 billion — up from about $15 billion in 2004.
Reflecting higher net catastrophe
losses, the industry suffered a $5.9 billion net loss on underwriting in 2005 —
a $10.2 billion adverse swing from the $4.3 billion net gain on underwriting in
2004.
“Fortunately for both insurers and
policyholders, last year’s catastrophes occurred at a time when increasing
investment yields and rising stock markets bolstered insurers’ investment
results,” said Heidrich.
Net investment income — primarily
dividends from stocks and interest on bonds — grew 23.7 percent to $49.5
billion in 2005 from $40 billion in 2004. Insurers’ investment income in 2005
benefited from $3.2 billion in one-time special dividends that one insurer
received from an investment subsidiary. Excluding those special dividends,
investment income rose 15.8 percent to $46.3 billion last year, as insurers’
average holdings of cash and invested assets grew 9.2 percent and the yield on
cash and invested assets rose to 4.3 percent in 2005 from 4 percent in 2004.
With improvement in investment
results offsetting deterioration in underwriting results, the industry’s rate
of return on average surplus edged up to 10.5 percent in 2005 from 10.4 percent
in 2004. But excluding the $3.2 billion in special dividends one insurer
received from an investment subsidiary, the industry’s rate of return dropped
0.6 percentage points to 9.8 percent in 2005.
Pre-tax operating income — the sum of
gains or losses on underwriting, net investment income and miscellaneous other
income — rose $0.5 billion, or 1.2 percent, to $44.5 billion in 2005 from $44
billion in 2004. Excluding nonrecurring special dividends, operating income
fell $2.7 billion, or 6.1 percent, to $41.3 billion. Limiting the decline in
adjusted operating income, miscellaneous other income rose
$1.2 billion to positive $0.9 billion in 2005 from negative $0.3 billion in
2004.
Also contributing to the industry’s positive financial results for 2005, realized
capital gains on investments rose $0.6 billion, or 6.3 percent, to $9.7 billion
last year from $9.1 billion a year earlier.
The industry’s federal income taxes
fell $3.4 billion, or 23.5 percent, to $11.2 billion last year from $14.6
billion in 2004.
Combining realized capital gains and
net investment income, net investment gains rose $10.1 billion, or 20.5
percent, to $59.2 billion in 2005 from $49.1 billion a year earlier.
The net loss on underwriting in 2005
amounts to 1.4 percent of the $417.7 billion in premiums earned during the
period, in contrast to the net gain on underwriting in 2004 amounting to 1
percent of the $413.8 billion in premiums earned during that period.
Based on reported results, overall net
written premiums rose $1.6 billion, or 0.4 percent, to
$425.7 billion in 2005 from $424.1 billion in 2004. Net earned premiums
increased $3.9 billion, or 0.9 percent, to $417.7 billion in 2005 from $413.8
billion in 2004. Net loss and loss adjustment expenses rose $10.4 billion, or
3.5 percent, to $311.4 billion last year from $300.9 billion a year earlier.
But
At an adjusted 1.8 percent in 2005,
net written premium growth equaled the record low set back in 1998, with
written premium growth slowing from 4.9 percent in 2004, 9.4 percent in 2003
and a cyclical peak of 14.3 percent in 2002. Similarly, at an adjusted 2.4
percent in 2005, earned premium growth dwindled to its slowest pace since the
1.8 percent increase in 1999 — down from 7.1 percent in 2004, 10.9 percent in
2003 and 11.9 percent in 2002.
Though overall net loss
and loss adjustment expenses increased $10.4 billion to $311.4 billion in 2005,
non-catastrophe net loss and loss adjustment expenses fell $7.9 billion, or 2.8
percent, to $277.8 billion last year from $285.7 billion in 2004. Adjusted for
a special transaction that ceded $6 billion of one insurer’s losses to its
foreign parent, non-catastrophe loss and loss adjustment expenses fell $1.9
billion, or 0.7 percent, to $283.8 billion in 2005.
Other underwriting
expenses — primarily acquisition expenses, other expenses associated with
underwriting, pricing and servicing insurance policies, and premium taxes —
rose $3.5 billion, or 3.3 percent, to $110.3 billion in 2005 from $106.8
billion a year earlier.
Dividends to
policyholders increased 9 percent to $1.9 billion last year from $1.7 billion
in 2004.
The combined ratio — a key measure of
losses and other underwriting expenses per dollar of premium — rose 2.6
percentage points to 100.9 percent in 2005. Nonetheless, the combined ratio for
2005 was the third best annual combined ratio since 1980, surpassed only by the
98.3 percent combined ratio for 2004 and the 100.1 percent combined ratio for
2003.
“Despite the deterioration in
underwriting results as evidenced by the $10.2 billion swing to a $5.9 billion
net loss on underwriting and the 2.6 percentage point increase in the combined
ratio to 100.9 percent, slow premium growth suggests competition in many
insurance markets is intensifying. Market surveys and economic data support
this view,” said
The $35.8 billion increase in the
industry’s consolidated surplus in 2005 compares with the $44.3 billon increase
in 2004. The increase in surplus in 2005 consisted of $43 billion in net income
after taxes and $14 billion in new funds paid in, less $3.2 billion in
unrealized capital losses on investments, $15.2 billion in dividends to
stockholders and $2.8 billion in miscellaneous charges against surplus.
The $3.2 billion in unrealized
capital losses last year is a $13.8 billion adverse swing from the $10.6
billion in unrealized capital gains in 2004. Combining the $3.2 billion in
unrealized capital losses in 2005 with the $9.7 billion in realized capital
gains during the period, the industry posted $6.5 billion in overall capital
gains last year, down from $19.7 billion during 2004 and $31.6 billion in 2003.
“The drop in insurers’ total capital
gains on investments reflects developments in stock markets, with increases in
the S&P 500 slowing to 3 percent in 2005 from 9 percent in 2004 and 26.4
percent in 2003,” said Heidrich. “But the situation
remained far better than it was from 2000 to 2002, when three consecutive
double-digit declines in the S&P 500 led to $35.7 billion in total capital
losses. Insurers’ $57.8 billion in total capital gains from 2003 to 2005
certainly helped them withstand last year’s record catastrophe losses.”
The $14 billion in new funds paid in during
2005 is up 59.7 percent from the $8.8 billion in new funds paid in during 2004.
The $15.2 billion in dividends to
stockholders in 2005 is up 8.3 percent from the $14 billion in dividends to
stockholders a year earlier.
The $2.8 billion in miscellaneous
charges against surplus in 2005 compares with $0.5 billion in miscellaneous
additions to surplus in 2004.
“The $38.1 billion in direct insured
losses to property from Hurricane Katrina should serve as a wake-up call to us
all. It is easy to imagine storms causing $100 billion or more in losses,” said
Heidrich. “When Hurricane Andrew made landfall near
the small town of
“Regardless of whether climate change
is leading to increases in the number of storms or their intensity, analyses by
ISO’s catastrophe modeling subsidiary, AIR Worldwide, indicate that catastrophe
losses should be expected to double roughly every 10 years because of increases
in construction costs, increases in the number of structures and changes in
their characteristics,” said
Fourth-Quarter Results
The industry’s consolidated net
income after taxes for fourth-quarter 2005 amounted to $14.1 billion, up $2.5
billion from $11.6 billion in fourth-quarter 2004. The industry’s net income
for fourth‑quarter 2005 reflects the excess of $10 billion in pre-tax
operating income and $5.4 billion in realized capital gains over $1.3 billion
in federal income taxes.
The industry’s fourth-quarter pre-tax
operating income declined $2.8 billion, or 22 percent, from $12.8 billion in
fourth-quarter 2004. Fourth-quarter 2005 operating income consisted of $3.2
billion in net losses on underwriting, $13 billion in net investment income and
$0.3 billion in miscellaneous other income.
The $3.2 billion in net losses on
underwriting in fourth-quarter 2005 constitutes a $5.2 billion adverse swing
from the $2 billion in net gains on underwriting in fourth-quarter 2004.
Underwriting results suffered from sharply higher catastrophe losses. Direct
insured property losses due to catastrophes rose to $9.8 billion in
fourth-quarter 2005 from $0.5 billion in fourth-quarter 2004, according to
ISO’s PCS unit. Adjusted for catastrophe losses covered by foreign reinsurers, residual market mechanisms, and the Florida
Hurricane Catastrophe Fund, ISO estimates that private U.S. insurers’
underwriting results for fourth-quarter 2005 included $4 billion to $6 billion
in net losses from catastrophes — up from $0.3 billion in fourth-quarter 2004.
Fourth-quarter 2005 net losses on
underwriting amount to 3 percent of the $107.1 billion in premiums earned
during the period — a sharp contrast to net gains on underwriting amounting to
1.8 percent of the $105.8 billion in premiums earned during fourth-quarter
2004.
The industry’s combined ratio
deteriorated to 103.7 percent in fourth-quarter 2005 from 99 percent in
fourth-quarter 2004. At 103.7 percent, the industry’s fourth-quarter combined
ratio had risen to its worst level since the 114.2 percent experienced in
fourth-quarter 2002.
Written premiums rose 1.9 percent to
$104.2 billion in fourth-quarter 2005 from $102.2 billion in fourth-quarter
2004. At 1.9 percent, fourth-quarter written premium growth had slowed from 5.4
percent in 2004, 8.5 percent in 2003 and a cyclical peak of 15.8 percent in
2002 to its slowest pace since the 1.2 percent increase in fourth-quarter 1998.
Earned premiums rose 1.3 percent to
$107.1 billion in fourth-quarter 2005 from $105.8 billion in fourth-quarter
2004.
Overall loss and loss adjustment
expenses increased 7 percent to $81.5 billion in the fourth quarter of 2005
from $76.2 billion in the fourth quarter of 2004. Non-catastrophe loss and loss
adjustment expenses rose 1 percent to $76.7 billion from $75.9 billion a year
earlier.
Other underwriting expenses rose 3.5
percent to $27.7 billion in fourth-quarter 2005 from $26.7 billion in
fourth-quarter 2004.
Dividends to policyholders increased
24.5 percent to $1.1 billion in the fourth quarter of 2005 from $0.9 billion in
the fourth quarter of 2004.
The $13 billion in net investment
income is up 18.6 percent from $10.9 billion in the same period in 2004.
The miscellaneous other income in
fourth-quarter 2005 constitutes a $0.3 billion positive swing from the
miscellaneous other losses in fourth-quarter 2004.
The $5.4 billion of capital gains
realized in fourth-quarter 2005 is nearly twice the $2.8 billion in capital
gains realized during fourth-quarter 2004.
Combining net investment income and
realized capital gains, the industry posted $18.4 billion in net investment
gains in fourth-quarter 2005, up 33.8 percent from $13.7 billion a year
earlier.
Unrealized capital losses on investments
amounted to $2.7 billion in fourth-quarter 2005 — an $11.5 billion negative
swing from the $8.7 billion in unrealized capital gains on investments in
fourth‑quarter 2004.
Combining realized and unrealized
capital gains, the industry posted $2.7 billion in total capital gains in
fourth-quarter 2005, down 77 percent from the $11.5 billion in total capital
gains in fourth-quarter 2004.
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OPERATING RESULTS FOR 2005 and 2004 ($ Millions) |
||
|
|
|
|
|
TWELVE MONTHS |
2005 |
2004 |
|
|
|
|
|
NET WRITTEN PREMIUM |
425,653 |
424,089 |
|
NET EARNED PREMIUM |
417,663 |
413,777 |
|
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE |
311,395 |
300,948 |
|
STATUTORY UNDERWRITING GAIN
(LOSS) |
(4,051) |
5,984 |
|
POLICYHOLDERS’ DIVIDENDS |
1,876 |
1,721 |
|
NET UNDERWRITING GAIN
(LOSS) |
(5,928) |
4,263 |
|
PRE-TAX OPERATING INCOME |
44,472 |
43,962 |
|
NET INVESTMENT INCOME
EARNED |
49,456 |
39,966 |
|
NET REALIZED CAPITAL GAIN
(LOSS) |
9,696 |
9,125 |
|
NET INVESTMENT GAIN |
59,152 |
49,092 |
|
NET INCOME (LOSS) AFTER
TAXES |
43,013 |
38,501 |
|
SURPLUS (CONSOLIDATED) |
427,138 |
391,294 |
|
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES |
505,054 |
464,026 |
|
COMBINED RATIO,
POST-DIVIDENDS (%) |
100.9 |
98.3 |
|
|
|
|
|
FOURTH QUARTER |
2005 |
2004 |
|
|
|
|
|
NET WRITTEN PREMIUM |
104,216 |
102,238 |
|
NET EARNED PREMIUM |
107,114 |
105,788 |
|
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE |
81,538 |
76,207 |
|
STATUTORY UNDERWRITING GAIN
(LOSS) |
(2,095) |
2,849 |
|
POLICYHOLDERS’ DIVIDENDS |
1,119 |
899 |
|
NET UNDERWRITING GAIN
(LOSS) |
(3,214) |
1,950 |
|
PRE-TAX OPERATING INCOME |
10,021 |
12,847 |
|
NET INVESTMENT INCOME
EARNED |
12,983 |
10,945 |
|
NET REALIZED CAPITAL GAIN
(LOSS) |
5,399 |
2,792 |
|
NET INVESTMENT GAIN |
18,383 |
13,737 |
|
NET INCOME (LOSS) AFTER
TAXES |
14,097 |
11,551 |
|
SURPLUS (CONSOLIDATED) |
427,138 |
391,294 |
|
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES |
505,054 |
464,026 |
|
COMBINED RATIO,
POST-DIVIDENDS (%) |
103.7 |
99.0 |