Insurers gashed in 2-Q by tumbling investment returns

Canadian property and casualty insurers produced a net profit for the second quarter of this year of $192 million, reflecting a 30% drop compared with the $275 million reported for the same period the year previous. The industry’s net earnings for the first six months of this year fell by 20.5% to $300 million compared with the $377 million shown at the end of June 2001. As a result, insurers gained a 4% return on equity (ROE) for the second quarter (second quarter 2001: 5.7%), while the ROE for the last 12 months to end June clocked in at 2.7% (June 2001: 5.2%).
Insurers’ income statements for the latest reporting period were particularly hard hit by declining investment returns and limited scope for capital gains. Investment income for the second quarter dropped by 8.2% year-on-year to $525 million, with the six-month performance showing a similar percentage decline to amount to just over $1 billion. Realized gains for the second quarter of this year fell by a startling 62% to $27 million (2-Q 2001: $72 million), while the six month period produced a more moderate 16.7% decline to $165 million (June 2001: $198 million). "The collapse this year in investment markets is disappointing news as reduced income from industry investment portfolios is adding pressure on pricing," says the Insurance Bureau of Canada’s (IBC) chief economist Paul Kovacs.
Although the industry’s underwriting loss for the second quarter of this year and for the first six months rose by about 13%-14.5% year-on-year to $214 million and $687 million respectively, significant revenue gains were made over both periods, observes Kovacs. Net premiums written for the second quarter rose by 19.7% to $7.3 billion compared with the same period the previous year, with the six-month period showing a jump of about 17.5%. Net earned premiums for the second quarter increased by 10.2% year-on-year to $5.6 billion while the six month period showed a 11.3% gain. In contrast, claims costs rose by 12.4% for the second quarter of this year, and by 10.9% for the first six months. The industry’s combined ratio eased back marginally to 103.8% for the second quarter of this year (2-Q 2001: 104.8%), with the ratio for the six months following similar improvement to 106.1% (June 2001: 108%).
Kovacs notes that the second quarter insurer returns show a $33 million decline in underwriting loss, largely as a result of tighter underwriting conditions and accelerated price firming. Rates have risen this year at a faster pace than that of claims costs, he adds, which last occurred in 1995. "Revenue growth [this year] is the strongest since 1986." However, insurers remain plagued by spiraling auto losses, with the Ontario market reflecting an alarming 94% loss ratio for the 12 months to end June, and the Atlantic region continuing to operate at a ratio of 100%-plus.
Kovacs says recently submitted auto insurance product reform legislation in Ontario bodes well for a recovery in this line of business, although the industry has been less successful in lobbying for product change in the other provinces. Overall, he says the gains made in revenue for the latest reporting periods suggest that insurers are on the road to financial recovery. But, a full recovery is likely going to take at least another year or two, he adds.