U.S. insurers produce modest gain

U.S. property and casualty insurers boosted their return on equity (ROE) to 7.4% for the first quarter of this year compared with the 6.3% return made for 2000, according to the Insurance Services Office Inc. (ISO) and the National Association of Independent Insurers (NAII).

Despite the quarterly improvement in ROE and a 10.4% hike in written premiums for the 12 months to end March 2001, the U.S. industry’s taxed income for the first quarter of this year dropped 5.5% year-on-year to US$5.6 billion (1st quarter 2000: US$5.9 billion). The industry’s consolidated surplus (assets minus liabilities) also fell by nearly 5% to US$303.7 billion by the end of March this year compared with the US$318.7 billion recorded at the end of 2000 (the final quarter of 2000 produced the first drop in the industry’s surplus since 1984).

The decrease in earnings was partially influenced by a rise in the underwriting loss to US$6.1 billion for the 2001 first quarter compared with US$6 billion shown for the same period the year prior. The greater influence on the earnings decline lay with poor investment performance, which reduced insurers’ net gain on investments by 4% year-on-year to US$12.7 billion. “The last time quarterly premiums grew more than 10% year-over-year was the second quarter of 1987, when premiums rose 12.5%. The acceleration in written premium growth indicates that anecdotal reports of rate increases are finally being confirmed by actual data,” says John Kollar, vice president of consulting & research at the ISO. Diana Lee, vice president of research at NAII, notes “one sign that the acceleration in premium growth was driven by firming in insurance markets is that premium growth exceeded growth in the economy”.

The Insurance Information Institute’s (III) chief economist, Robert Hartwig, believes that the combination of rising written premiums and dropping excess surplus within the industry bodes well for future financial performance. “The industry has purged itself of a significant amount of excess capacity – 28% to 36% – of the US$100 billion to US$125 billion in excess capital it holds.” Although investors took profits on insurance stocks in the first half of 2001, Hartwig points out that the 3.1% decline in listed insurer stock prices over this period is significantly less than the 7.2% and 17.6% declines shown by the S&P 500 and Nasdaq.

Insurer Stock Price Performance

Source: SNL Securities and the Insurance Information Institute