U.S. insurers pull slowly from the red for 2002

U.S. property and casualty insurers disclosed net income of US$2.9 billion for the 2002 financial year compared with the net loss of US$7 billion reported the year before, according to data collected by the Insurance Services Office Inc. (ISO) and the National Association of Independent Insurers (NAII). The industry’s latest annual return translates to a disappointing return on equity (ROE) of 1%.
Although the industry’s net written premium and earned premium for 2002 rose year-on-year by 14.1% and 11.7% respectively to US$369 billion and US$348.1 billion, poor investment returns coupled with massive prior-year reserving adjustments eroded much of the benefits of price strengthening and curtailed claims costs. Insurers’ underwriting loss for 2002 at US$30.5 billion is almost half the US$52.6 billion loss reported for the previous year. As a result, the industry’s combined ratio eased back to 107.2% for last year compared with the 115.9% ratio shown for 2001. “While a decline in catastrophe losses certainly contributed to improvement in the industry’s combined ratio [for 2002], acceleration in premium played a bigger part. Even if catastrophe losses had remained at 2001 levels inflated by the [terrorist] attack on September 11 [2001], the combined ratio would have improved by 5.2 percentage points [for 2002],” observes Don Griffin, assistant vice president for business and personal lines at NAII.
The industry’s net investment income for 2002 slipped by 2.8% year-on-year to US$36.7 billion (2001: US$37.7 billion) while realized capital gains sank to a loss of US$1.1 billion compared with 2001’s realized gain of US$6.6 billion. The net result of investment income and the realized loss saw the industry’s overall investment gain drop by 20% for 2002 to US$35.5 billion versus the US$44.3 billion gain produced for 2001. The general decline in investment returns served as the main driver in a US$4.4 billion reduction in the industry’s capital surplus which clocked in at US$285.2 billion at the end of the 2002 financial year compared with the US$289.6 billion reported for 2001. “with investment results like those the industry experienced last year, the combined ratio would have to improve to 92.2% for the industry to achieve a 15% rate of return,” comments John Kollar, vice president for consulting and research at the ISO.
One of the more significant factors which undermined the profitability of insurers in 2002 was the large reserve charges primarily made in the final quarter of the year, says Robert Hartwig, chief economist at the Insurance Information Institute. U.S. insurers generated about US$9.3 billion in net income for the first three quarters of 2002, he notes, which fell to US$2.9 billion by the end of the year. The disparity in these numbers is the result of “massive charges” taken in the fourth quarter to strengthen reserves. “These charges added billions [of dollars] to 2002 underwriting losses,” he adds. Stripping out the reserve adjustments made by companies produces a significantly more favorable industry combined ratio, Hartwig notes. “There is even solace to be found in last year’s large reserve charges, which are indicative of the industry’s resolve to address the issue of reserve deficiencies.”