Canadian/U.S. insurance markets bounce back

After several years of growth decline, the Canadian and U.S. property and casualty insurance markets appear to have turned a corner for the better based on results for the first quarter of this year. Industry economists and market analysts are particularly upbeat of a significant rise in net premiums recorded for the period, their enthusiasm sparked by the fact that this growth was largely driven by an upward movement in prices for both markets. Is this the beginning of the end to the soft market?- Many hope so.

While every cloud is said to have a silver lining, it is also fair to say that when enough of them gather, then a storm is likely brewing. And, indeed, the property and casualty insurance (p&c) industries in both Canada and the U.S. have experienced their share of turbulence over the past two years, with earnings having fallen to levels last seen in the 1970s. However, the storm seems to be breaking, with the first glint of light shining through with higher premium growth for the first quarter of this year.

The U.S. market reported a 3.2% increase in net written premium for the first quarter of 2000 compared with 1.9% for the whole of last year. The Canadian market delivered an even stronger performance posting an 8.7% rise in net written premiums for the first quarter. The growth in premium volume of both markets is largely attributed to higher rates, fueling a growing sense of optimism that the price cycle has turned.

Although both the Canadian and U.S. markets are still producing a relatively low rate of return of 7%, signals from the investment community are suggesting at a healthy comeback in earnings for 2000. Robert Hartwig, chief economist of the Insurance Information Institute (III), observes, “the first quarter 2000 financial results, while far from ideal, provide further evidence supporting the view that the financial performance of the p&c insurance industry may now be passing through a trough with a rebound on the horizon. Wall St. has already signaled this belief by sharply bidding up the stock price of most p&c insurers beginning late in the quarter.”

Paul Kovacs, chief economist of the Insurance Bureau of Canada (IBC), is applying a little more caution in interpreting the numbers. “The growth in premiums relative to claims is an encouraging sign in the first quarter results. Premiums written rose 8.7% over last year, reflecting price increases beginning to take effect in some key markets.” However, Kovacs warns that while this might hint at improved results later this year, “insurers need to secure lower expenses, fewer losses, and adequate prices to sustain improving underwriting results”.

Diana Lee, vice president of research at the National Association of Independent Insurers (NAII), also applies the brake to runaway optimism, “acceleration in premium growth is always good news from insurers’ perspective, but it is too soon to declare that the pricing cycle has turned — we’ve seen false starts before. For example, premium growth rose 3.4% in the third quarter of 1999 but then fell to 2.2% in the fourth”.

Indeed, both the Canadian and U.S. markets continue to suffer from exceedingly high underwriting and expense ratios with little relief from the investment side of the business. The result of which saw static or declining year-on-year growth in net taxed earnings for both markets for the first quarter of this year. But, as Hartwig notes, “pricing is critically important to the industry’s turnaround”.

Canadian outlook

The Canadian p&c industry produced a 7% return on equity for the first quarter of this year, showing modest improvement on the 6.5% rate achieved for 1999 and 6.8% for the year prior to that, according to preliminary data released by the IBC.

Despite the strong showing in net written premium growth, which translated to a 3.2% rise in net earned premiums, the industry’s net earnings remained mostly static at $1.1 billion (up by $141 million) compared with the same reporting period for 1999. The modest gain in net earnings was largely achieved on the back of realized capital gains which, for the quarter, amounted to almost the entire level reported for 1999. Overall, net investment gains for the quarter came in at $241 million.

Weaknesses in underwriting undermined the industry’s performance for the quarter, with the underwriting loss for the period clocking in at $312 million against the $305 million reported for the first quarter of last year. The greater level of growth in premium volume to that of underwriting and expenses did, however, see the combined ratio fall back to 106.4% compared with 107.1% for the same reporting period the year prior. Claims grew by 2.7% year-on-year for the 2000 first quarter with expenses rising by 2.2%.

Commenting on the results, Kovacs says the Ontario markets and the Quebec auto market showed signs of underwriting improvement during the quarter, while the Atlantic and Pacific markets, as well as Quebec property, remain weak. In addition, the IBC momentum index suggests that “only a handful of markets are reporting loss ratios lower than one year ago, so there is not yet evidence of a broad-based hardening”. Kovacs adds, however, “nevertheless, optimism is building that several insurance markets will begin to harden later this year”.

U.S. outlook

The U.S. p&c industry reported a rate of return of 7% for the first quarter of 2000, although net taxed income for the period fell by 35% to US$5.8 billion compared with US$9 billion reported for the same period the year prior, according to data released by the Insurance Services Office (ISO) and NAII. The drop in net earnings is largely attributed to deteriorating underwriting with a loss of US$6.1 billion — more than double that reported for the first quarter of 1999.

The quarter’s underwriting loss rose despite a modest dip in catastrophe losses to US$1.7 billion compared US$1.8 billion for the first quarter of last year. As a result, the combined ratio rose by 4.3 percentage points to 107.4% for the 2000 period. The industry also suffered a decline in realized capital gains, which fell by US$1.5 billion to US$3.4 billion. This drop wiped out a modest 2.9% improvement in investment income of US$9.8 billion, resulting in the industry’s pre-tax net investment gain (realized capital gains combined with net investment income) falling by US$1.2 billion. “The industry’s net loss on underwriting ballooned because growth in loss and loss adjustment expenses far exceeded growth in premiums, and underwriting results will continue to deteriorate so long as the large imbalance between growth in losses and growth in premiums persists,” says John Kollar, vice president of consulting and research at the ISO.

However, the 3.2% rise in net written premiums reported by the industry for the first quarter of 2000 does bode well for future earnings, comments Hartwig. This, combined with a modest decline in the industry’s surplus (reserves in excess of liabilities) could pave the way to a quick recovery in rates of return, he adds. ‘The decline [in surplus] represents just 0.2% of industry surplus and does not represent a threat to insurer solvency. Moreover, analysts have estimated the industry’s ‘excess’ capital at US$100 to US$125 billion. If insurers are able to grow net income while at the same time reducing surplus, returns on equity will rebound quickly.”