Investments trouble insurer Q3 earnings: IBC

Despite a declining underwriting loss for Canadian p&c insurers thus far in 2002, investment market declines are hitting balance sheets hard.
In its quarterly “Perspectives” report, the Insurance Bureau of Canada (IBC) notes that in the last two quarters investment income has dropped $500 million. This muddied the impact of increased premiums and a lower loss ratio during the quarter and for the year-to-date.
Growth in premiums (an 18.6% rise in direct written premiums and 5.5% increase in net premiums earned) did outpace claims growth at 4.1% for the quarter ending September 30, 2002 as compared with the same period a year earlier. And for the first nine months of this year, direct written premiums were up 13.7% and net earned premiums up 9.0% with claims growth of 8.6% as compared with the same point in 2001.
The industry’s loss ratio was strengthened to 76.5% versus 77.5% last year for the third quarter. And its underwriting loss fell by 49.5% to $226 million from $427 million last year during the three-month period. Year-to-date, the underwriting loss stands at $765 million versus a $1.05 million underwriting loss for the first nine months of 2001.
Nonetheless, the industry saw a 27.9% drop in net income during the quarter, to $176 million against $244 million last year. And for the first nine months, net income stands at $464 million, a 22.3% drop over the $597 million reported at the end of September, 2001.
“Insurers are actively working to re-establish healthy earnings. 2001 was the worst year on record, but earnings fell 22% during the first nine months of 2002, making a bad situation even worse,” says Paul Kovacs, chief economist for the IBC.
The 12-month rolling ROE (return on equity) now stands at a dismal 2.9% despite positive movement on the underwriting side.
“Although conservative investment practices moderated the impact, Canadian insurers suffered from the harmful impact of the decline in equity markets last year and again this year,” Kovacs notes.
The industry saw a 78.3% drop in investment income in the third quarter, bringing in $34 million, versus $158 million for the same period last year. And in the first nine months, investment income totals $132 million, a 60% drop from the $331 million reported last year at the same point.
Investments have shifted increasingly away from less risky government bonds towards more volatile corporate bonds and equities. “This shift to moderately more risky investment brought additional investment income to insurers between 1994 and 2000. However, in 2001 and 2002 this trend was reversed for many insurers,” Kovacs comments. By the third quarter of 2002, investment income was at its lowest level in eight years.
The other trouble zone for insurers is capitalization. An industry once criticized for being over-capitalized is now reporting a third of the capital growth it once did, and this comes despite rapid premium growth. Kovacs now wonders how the industry would respond to a catastrophic event such as the 1998 ice storm were such a thing to happen today. “Five consecutive years of rapid claims growth, volatile investment markets and poor earnings has left the industry vulnerable. It is not business as usual for insurance consumers and insurers, with significant further market adjustments needed to re-establish healthy markets.”