U.S. insurers bounce back in the final run of 2002

U.S. property and casualty insurers achieved a 4.4% return on equity for the first nine months of 2002 compared with the negative 1.2% return reported for the same period the year before. Insurers brought home a taxed profit of US$9.3 billion for the latest nine month reporting period against the net loss of US$2.6 billion made for the same period in 2001. The turnaround largely resulted from higher premium volumes achieved over the nine months with the industry’s overall underwriting loss plummeting on the back of significantly reduced catastrophe losses, according to data collected by the Insurance Services Office (ISO) and the National Association of Independent Insurers (NAII).

Net written premiums rose by 13.6% year-on-year to US$279.8 billion for the latest nine month reporting period, with earned premiums rising by 11% to US$258.3 over the same period. “Premium growth of 13.6% is the best in 16 years,” says Robert Hartwig, chief economist at the Insurance Information Institute (III). The strong rebound in the industry’s taxed net income for the first nine months of 2002 is a positive development, he adds, although net returns remain below management and investor expectations. As a result, the “hard market” will have to carry beyond 2003 if insurers expect to achieve a reasonable rate of return for 2004, he says. “In sum, insurer financial performance continues to improve but at a painfully slow pace that is disappointing to management and investors alike.”

The industry produced an underwriting loss of US$18 billion for the first nine months of 2002, a stark contrast to the US$37 billion loss reported for the same period in 2001. Catastrophe losses for the first nine months of last year totaled US$3.9 billion against the US$16.3 billion loss made for the same period a year ago. As a result, the industry’s combined ratio dropped to 104.9% for the latest reporting period compared with the 114.4% recorded 12 months previously. “The decline in catastrophe losses accounts for 5.2 percentage points of the 9.5 percentage point improvement in the industry’s combined ratio for nine months 2002. The news is not that catastrophe losses fell from 2001 levels elevated by terrorism losses, but that almost half of the improvement in underwriting results came from premium growth in excess of growth in non-catastrophe losses and other expenses. Firming in insurance markets is finally benefiting underwriting results,” says John Kollar, vice president of consulting and research at the ISO.

Insurers’ net investment gain, including investment income and realized capital gains, fell by 15% to US$29.5 billion for the first nine months of last year compared with the US$34.6 billion reported for the same period in 2001. Net investment income came in 5.4% lower at US$26.4 billion for the latest reporting period (nine months 2001: US$28 billion) while realized capital gains plummeted by 54% year-on-year to US$3.1 billion. Overall capital losses of US$25 billion for the first nine months of 2002 (including US$28 billion in unrealized capital losses minus the US$3.1 billion in capital gains) was largely responsible for a US$16.3 billion decline in the industry’s capital surplus. Hartwig notes that the surplus level at the end of September 2002 stood at US$63 billion less than the industry high of US$336 billion reported at the end of June 1999. This represents a loss in underwriting capacity of about US$100 billion in net premiums, he observes. In looking at the most recent surplus numbers, the industry’s consolidated capital surplus, including the US$9.3 billion gain in net income, totaled US$273.2 billion for the latest reporting period against the US$281.3 billion reported 12 months ago.