A.M. Best Special Report: First Quarter Property/Casualty Results Improve on Strong 2004.

OLDWICK, N.J. -- The property/casualty industry improved on year-end 2004 results as the industry reported an underwriting gain of $6.8 billion and a 92.3 combined ratio during the first quarter of 2005, according to a special report released by A.M. Best Co. In addition, favorable cash flow promoted growth in investment income to nearly $14 billion, offset by a down equity market that yielded capital losses of $4 billion, leading to a $9.5 billion increase in surplus.

As the industry prospers, new competitors continue to enter the market. Existing competitors pursue segments that have performed well for them, or new segments that may offer greater profit opportunities. This competition contributes to driving down prices, as evidenced by written premium growth falling to a paltry 1.3% increase over first-quarter 2004. Growth in earned premiums continues to outpace growth in premiums written, as rate increases decelerate. However, growth in earned premium in the first quarter of 2005 has slowed significantly to 3%, indicating improvements in the combined ratio are likely to have peaked. In lieu of the strong pricing experienced in the past few years, A.M. Best believes stringent underwriting practices, accompanied by wise investment decisions, will be crucial to profitability in upcoming quarters.

Nonetheless, the first quarter combined ratio improved modestly by 1 point to 92.3 from the 93.3 reported in first-quarter 2004, making it the most profitable quarter in the past five years. The increased profitability occurred despite it being the second worst first quarter for catastrophe losses since 1996, with those losses estimated at $2.1 billion. The incurred catastrophe losses were more than double the amount seen in the first quarter of 2004. Favorable loss reserve development of $1.2 billion bolstered underwriting results, as is typical for the first quarter.

While A.M. Best recognizes first-quarter 2005 as a strong one for the industry, care should be taken, as the first quarter is usually fairly quiet, and sustainability throughout the remainder of the year is difficult. The first quarter is typically quiet with regard to loss-reserve development, and the fact that winter and spring storm losses generally are less costly than hurricane losses. History indicates the impact of these losses typically affects the latter quarters of the calendar year.

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A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.