Canada/U.S. data shows similar ails

Canadian and U.S. property and casualty insurance results for the first half of 1999 show a marked decline in earnings, primarily due to weak investment returns and sluggish premium growth.

Both the Canadian and U.S. industries witnessed a rise in loss ratios for the second quarter when compared with the figures for the same period in 1998. However, the silver-lining to the U.S. quarterly results is early signs of a broad-based market rate strengthening, with many insurers preferring to turn away unprofitable business — which is partly attributed to the weak growth in premium income. The Canadian market appears to not have reached this stage of the business cycle, with several markets including the Atlantic Coast region and Ontario showing further loss deterioration. However, a significant decline in catastrophe-related losses for the first half of the year compared with that of 1998 helped support results of insurers in Canada and the U.S.

Canadian investment blues

Canadian industry earnings remain unsustainable with the return on investment (ROE) having clocked in at below 7% for the past four quarters, observes Paul Kovacs, senior economist at the Insurance Bureau of Canada (IBC). Although the industry’s combined ratio for the second quarter came in moderately lower at 103.8% than that for the comparative quarter last year, the ratio for the first six months was higher at 105%. The good news is that the first six month combined ratio is below 1998’s 107.6% and the 109.6% average for the 1980s, Kovacs notes.

The second quarter saw a 40.4% decline in realized gains, reducing the industry’s total investment income for the period by 14.6%. Premium growth remained flat for both the second quarter and the first six months of the year. Claims rose in the second quarter by 1.6%, producing an underwriting loss for the period of $153 million.

Overall, the industry’s net income for the second quarter fell by 30% to $299 million compared with $429 million for the same period in 1998. The sharp drop in investment income for the first half of the year serves as the main problem-child for insurers, Kovacs says. “The major change in performance during the first half of this year has been in investment income. Interest and dividend income has declined by 2%, while realized gains fell by 53%.”

Although a general improvement is expected of the investment environment, Kovacs stresses the need for improved underwriting. Atlantic Canada auto deteriorated significantly during 1999 with loss ratios on Ontario’s commercial property coming in noticeably weaker as well, he adds.

U.S. premium slump

U.S. insurers suffered a poor second quarter primarily due to stalled premium growth, this despite operating in a generally robust economy, says Robert Hartwig, chief economist at the New York City-based Insurance Information Institute (III).

The positive take on this, Hartwig observes, is that the lackluster growth in revenue may be in part due to insurers turning away unprofitable premium. “Various agent surveys indicate that price cutting has been reined in. One year ago, the typical commercial lines renewal came with a 10% price-cut compared with cuts of about 4% and 1% in February and July of this year…some of the weakness in premium growth reflects the fact that major companies are now walking away from hundreds of millions of dollars in unprofitable business. Commercial auto and workers’ compensation are the lines most affected.”

The U.S. industry’s net income for the first half of 1999 fell by 3.5% to US$15.1 billion compared with that of the same period the previous year, the ISO and National Association of Independent Insurers (NAII) report. Net written premiums for the six months rose by 1% to US$143.4 billion (annualized U.S. gross domestic product for the six months climbed by 3.9% on an inflation adjusted basis) amounting to less than half of the growth recorded for the first half of 1998. The drop in the industry’s net earnings for the first half of 1999 is blamed on a 32% rise in underwriting losses to US$8 billion. Pre-tax investment income also clocked in lower by 3% to US$27.2 billion. Although catastrophe losses for the period were 5.1% lower than the previous year at US$5.2 billion, the industry’s combined ratio for the first half of 1999 rose to 104.9% from 103.6%.