U.S. insurers’ 1-Q ROE of 8% a turning point: III

The 20% year-on-year jump in net earnings of U.S. insurers to US$6.4 billion for the first quarter of this year translates to a return on equity (ROE) of 8.8%, notes the Insurance Information Institute’s (III) chief economist Robert Hartwig. This follows the industry’s dismal ROE of 1% for the 2002 financial year and the record-low negative return of 2.4% posted for the prior year. “The first quarter of 2003 got property and casualty insurers off to their best start in years, setting the stage for what could become the industry’s first reasonably profitable performance since 1997.”
But, despite the strong 12.7% rise in net written premiums to US$101.3 billion for the first quarter of this year – which should see the industry breaking through the US$400 billion mark for the full year – there remain several challenges before insurers, Hartwig says. Firstly, the rise in net written premiums for the latest reporting period is moderately lower than the growth achieved during 2002, he observes, which suggests that rates may be decelerating. Another factor is that, while the industry was able to bring the combined ratio down to 99.5% by the end of the first quarter of this year, the weak investment environment requires a far greater reduction in operating costs in order to achieve the necessary 15% ROE expected by shareholders. The fact that the industry only managed to produce an 8.8% ROE for the latest reporting period on the back of a combined ratio of less than 100% is indicative of the negative impact the investment environment has had on insurers’ returns, he adds.
In this respect, insurers have to address the cause for the ongoing rise in claims costs, Hartwig says. Although claims costs rose year-on-year by 10.7% to US$70 billion for the first quarter of this year – less than the gain made in earned and written premiums over the same period – this increase remains significantly higher than the U.S. annual growth in gross domestic product (GDP) of 3.8%, as well as the 2.9% rate of inflation. “This strongly suggests that there are still underlying problems with claim frequency and severity in many lines of insurance that need to be addressed.”
On a positive note, Hartwig sees the 1.4% increase in insurers’ surplus to US$289 billion for the first quarter of this year as a right step in addressing reserving concerns. However, there is a “downside” in that a rise in surplus may result in increased capacity chasing premium dollars in an otherwise lackluster economy. “Unless the bottom falls out of the stock markets during the second half of this year, or the industry is rocked by well-above losses, or reserve charges clobber balance-sheets more than usual, surplus for the year will likely expand for the first time since 1999.”