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U.S. Insurers Triple Net Earnings for 2003 Half-Year


October 1, 2003   by Canadian Underwriter


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Robert Hartwig

U.S. property and casualty insurers increased net taxed income for the first half of this year to US$14.5 billion – representing a 3.3 times rise on the US$4.4 billion reported for the same period last year, according to data released by the Insurance Services Office (ISO) and the National Association of Independent Insurers (NAII).

As a result, the industry’s return on equity (ROE) for the latest six month period clocked in at 9.7% compared with the lackluster 1.8% return shown for the first half of last year. “Results through the first six months of [this] year have put the property and casualty insurance industry on a trajectory towards its best profit performance since 1997…Indeed, with a combined ratio of 99.8% through the first six months of this year, insurers could well realize their first underwriting profit since 1978,” observes Robert Hartwig, chief economist at the Insurance Information Institute (III).

The dramatic rise in industry profitability was largely driven by reduced underwriting losses as the pace of incoming premium income continued to outstrip the growth in claims costs. Insurers also enjoyed a modest recovery in investment income growth during the first half of this year, while capital gains reported for the period jumped to US$4.5 billion versus the US$600,000 capital loss made over the same period in 2002. Net investment income crept forward at a sedate 2.1% annual rate to reach US$18.3 billion (first half 2002: US$17.9 billion). Total net investments, incorporating investment income and capital gains, rose by more than 32% to US$22.8 billion for the first six months of 2003 compared with the US$17.3 billion reported for the first half of last year.

Net written and earned premiums for the first six months of this year climbed by 11% and 12.3% year-on-year to US$202.8 billion (first half 2002: US$182.7 billion) and US$190 billion (first half 2002: US$169.1 billion) respectively. In contrast, the industry’s underwriting loss for the first half of 2003 fell by 77.5% to US$2.7 billion from the US$12 billion reported for the same period a year ago – despite catastrophe losses nearly doubling to US$6.5 billion for the latest six months compared with the US$3.4 billion incurred during the first half of 2002. “The most important piece of information – by far – to emerge from the first half results is the remarkable turnaround in the industry’s underwriting performance,” says Hartwig. Notably, the annual growth rate in claims costs for the latest six months amounts to 5.4% – less than half the rate at which earned premiums grew by over the same period.

As a result, the industry’s combined ratio for the first half of 2003 came in at 99.8%, reflecting a 5.3 percentage point improvement on the 105.1% ratio shown for the first two quarters of last year. “The 99.8% combined ratio for the first half of 2003 is the best underwriting result for any six month period since 1986,” observes Don Griffin, assistant vice president of personal and business lines at NAII.

The rise in profitability saw the industry’s surplus increase by US$28.1 billion during the first half of this year to US$312.4 billion compared with the US$7.6 billion decline reported for the same period during 2002. The almost 10% increase in surplus over the last six months is the first “expansion” since 1999, notes Hartwig, and while this is positive news, there is a “danger factor” in that rising capacity in an otherwise “moribund economy” could see the industry faced with its old problem of ineffective capital employment. “In other words, there may be too much money chasing too little exposure.”

And, with the surplus rising, while the combined ratio has fallen to below 100% and insurers are producing close to double-digit ROEs with the investment environment looking brighter, the “unknown factor” is how long companies will maintain underwriting discipline, observes John Kollar, vice president of research at the ISO. He points to the slightly lower growth of 11% in net written premiums reported by the industry for the latest six months versus the 12.2% growth rate achieved over the same period in 2002, and questions whether this signals a leveling off of market pricing.