U.S. property and casualty insurers saw their net income jump an impressive 320.6% to US$21.1 billion for the nine months ending September 30, 2003, versus the US$5 billion posted for the same period a year earlier. Equally welcome was a return on equity of 9.3% for the first nine months of 2003, up from 1.0% the year earlier, according to results released by the Insurance Services Office (ISO) and National Association of Independent Insurers (NAII). Much of the growth comes on the back of continued underwriting progress. Net written premiums were up 10.1% to US$308.6 billion, with earned premiums up to US$288.7 billion from the US$258.6 billion posted a year before. Nonetheless, this does represent a drop from the 14.3% premium growth posted in 2002, and for the third quarter of 2003 specifically, premium growth slowed to just over 9%. “The fact that premium growth is leveling off sooner that expected is not necessarily all bad news for insurers,” comments Robert Hartwig, chief economist of the Insurance Information Institute (III). “In some cases it simply reflects the fact that underwriting performance targets have been realized more quickly than anticipated.” The industry’s underwriting discipline has seen its combined ratio drop to 100.3% for the first nine months of 2003, from 105.0% a year earlier. The industry also posted an underwriting loss of just US$5.7 billion for the first three quarters of 2003, with Hartwig projecting underwriting losses for 2003 yearend to reach US$12 billion, a 77% decline since 2001’s record US$52 billion underwriting loss. Investment income was up 3.2% even in the face of low interest rates, and realized investment gains, which were negative US$1.3 billion in the first nine months of 2002, were US$5.9 billion for the same period in 2003. Overall, policyholder surplus grew by 12.1% to reach US$319.9 billion, up from US$285.4 billion at the end of 2002. “To insurers’ credit, much of the progress to date reflects increased attention to the fundamentals of our business solid underwriting, cost-based pricing and careful claim settlement,” says Don Griffin, NAII’s assistant vice president for business and personal lines. “Now the $64,000 question is, how long will insurers maintain their focus on the fundamentals? Each improvement in insurers’ results makes it that much harder to resist the temptation to ignore the fundamentals and go for market share.” “Results through the first nine months confirm that the industry remains in the midst of a broad-based recovery, with significant improvement noted in every key financial statistics,” says Hartwig. “Yet as good as the 2003 results are, it now appear that the current cycle will usher in a new and unwelcome profit dynamic, one that signals a distinct departure from the past.” The insurance industry is still not keeping pace with, let alone exceeding the returns set by the Fortune 500 and as these other companies ride the strengthening economy, insurers are watching the hard market wind down. Insurers also continue to face many elements of the “perfect storm” that led to five years of poor performance: skyrocketing tort costs, unending asbestos litigation, corporate governance crises, catastrophe losses and terrorism risks. And with investment returns unlikely to reach previous highs despite economic recovery, even with a combined ratio in the 100%-range, insurers are still not bringing investors the same returns seen in other industries. “The implications are sobering: as good as 2003’s results are through the first nine months, they’re still not good enough,” Hartwig says.