P/C industry net income, overall profitability slips

The U.S. property/casualty insurance industry’s net income after taxes dipped to $15.8 billion in first-quarter 2007 from $16.7 billion in first-quarter 2006 and $17.7 billion in first-quarter 2005, according to industry analysts at the ISO and the Property Casualty Insurers Association of America (PCI). Reflecting the declines in net income, the property/casualty industry’s annualized rate of return on average policyholders’ surplus (statutory net worth) dropped to 12.9 percent in first-quarter 2007 from 15.5 percent in first-quarter 2006 and 17.9 percent in first-quarter 2005.

“Insurers’ 12.9 percent rate of return for first-quarter 2007 was 1.8 percentage points above insurers’ 11.1 percent average first-quarter rate of return since the start of ISO’s quarterly data in 1986, but it fell short of the rates of return typically earned by firms in other industries,” said Michael R. Murray, ISO’s assistant vice president for financial analysis.”

Premium growth slows
Contributing to the $0.9 billion, or 5.5 percent, decline in net income in first-quarter 2007, the industry’s net gain on underwriting receded to $8.3 billion in the first three months of this year from $8.4 billion in the first three months of 2006, as net written premium growth versus year-ago levels slowed to 0.8 percent in first-quarter 2007 from 1.8 percent in first-quarter 2006.

Also contributing to the decline in net income, the industry’s federal income taxes rose to $5.4 billion in first-quarter 2007 from $5.3 billion in first-quarter 2006. But much of the decline in first-quarter net income reflects a special transaction in which one U.S. insurer assumed $9.3 billion in liabilities from a foreign entity in exchange for considerations valued at $7.1 billion.

“Seasonal patterns in the data also suggest that insurers’ rate of return will decline later this year,” said Genio Staranczak, PCI’s chief economist.

“Insurers’ profitability in the first quarter usually exceeds their profitability later in the year, in part because of the timing of weather-related catastrophe losses. The Atlantic hurricane season runs from June 1 to Nov. 30.”

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. P/C insurers.

Net written premiums grew $0.9 billion to $111.4 billion in first-quarter 2007 from $110.5 billion in first-quarter 2006, but written premium growth slowed to 0.8 percent in the first quarter of this year from 1.8 percent in the first quarter of last year, the analysts reported.

“Similarly, net earned premiums rose $2 billion to $108.6 billion in first-quarter 2007 from $106.6 billion in first-quarter 2006, as earned premium growth slowed to 1.9 percent during the first three months of 2007 from 2.7 percent during the first three months of 2006,” analysts said.

“At 0.8 percent in first-quarter 2007, net written premium growth was the weakest for any first quarter since 1992,” said Murray. “Market surveys and U.S. government data indicate that escalating competition and declines in the price of insurance are cutting into premium growth.”

“In first-quarter 2007, net written premiums were up 0.8 percent from a year ago, while the nation’s gross domestic product (GDP), which takes into account both inflation and real growth, increased 4.6 percent during the same time frame,” Staranczak said. “That premiums grew only about one-sixth as much as GDP is an indication that intensifying competition is leading to lower prices for most coverages in most locations, though property insurance remains scarce and expensive in some coastal areas.”

Loss expenses increase
Overall loss and loss adjustment expenses increased $1.1 billion, or 1.6 percent, to $70.4 billion in first-quarter 2007 from $69.3 billion in first-quarter 2006, the analysts reported. Non-catastrophe loss and loss adjustment expenses rose $1.3 billion, or 1.9 percent, to $69.1 billion in first-quarter 2007 from $67.8 billion in first-quarter 2006. But according to ISO’s Property Claim Services (PCS) unit, direct insured losses from catastrophes dropped to $1.3 billion in the first three months of 2007 from $1.5 billion in the corresponding portion of 2006.

Other underwriting expenses — primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — rose $1.1 billion, or 3.8 percent, to $29.6 billion in first-quarter 2007 from $28.6 billion in first-quarter 2006.

Combined ratio
The combined ratio rose to 91.7 percent in first-quarter 2007 from 91.1 percent in first-quarter 2006, with the change in the combined ratio reflecting imbalances between the growth in premiums and the costs of providing insurance.