Insurers’ Combined Ratio Drops as Profits Rise For 2-Q

Insurers managed to bring their combined ratio to below the key 100% mark for the second quarter of this year as coverage price hikes implemented by companies over the last two years finally began to outstrip the growth in claims costs, according to preliminary industry data collected by the Insurance Bureau of Canada (IBC). The property and casualty insurance industry finished the second quarter with a 98.8% combined ratio, showing a six percentage point improvement on the 104.8% posted for the same period last year.

Although insurers were able to generate a net profit of $644 million for the second quarter of this year compared with the $110 million profit reported for the same period in 2002, the industry is still not on solid financial ground, observes the IBC’s chief economist Paul Kovacs. “Overall, the financial health of the insurance industry improved during the first half of 2003, yet it [the industry] remains troubled.” The industry continues to feel financial pressure from auto losses, Kovacs says, with injury claims being the prime culprit (see auto claims costs chart). The industry’s improved bottom-line earnings saw return on equity (ROE) clocking in at 5.9% for the 12 months to the end of June against the paltry 2.8% return shown for the comparable period last year. Despite the latest ROE being more than double the return at the end of June 2002, Kovacs notes that the most recent results still show a net rate of return of just over half of the industry’s long-term average of 10%.

Insurers’ net written premiums rose by 11% year-on-year to $8.5 billion for the second quarter of this year (2002 2-Q: $7.6 billion), while net earned premiums increased by 15.4% to $6.9 billion for the same period (2002 2-Q: $6 billion). In contrast, claims costs grew year-on-year by a more sedate 7.4% to $4.9 billion for the second quarter of this year (2002 2-Q: $4.5 billion), which resulted in the industry producing a modest underwriting profit of $113 million for the latest reporting period (2002 2-Q: $279 million loss). The industry’s investment income remained almost static at $520 million for the latest reporting period compared with the $524 million reported for the second quarter of 2002.

Although the commercial and property markets have regained a healthy shine, the loss experience in auto across Ontario, Atlantic Canada and Alberta remains unacceptable, Kovacs notes. Ontario’s auto loss ratio of 95% for the second quarter of this year is higher than the ratio posted at the end of June 2002, he observes. “These results remain unacceptable and unsustainable.” He also points out that the residential and commercial property markets will likely show marked deterioration in the second half of 2003 as a result of the widespread B.C. wildfires, as well as losses stemming from a series of summer storms. Kovacs says that the losses arising from the B.C. fires could potentially amount to being the third largest insurance loss in Canada.

The IBC’s industry quarterly financial report also shows a significant revision to the financial results posted for 2002. Insurer’s ROE for last year came in moderately lower at 1.7% – which Kovacs notes is the lowest rate of return ever made by the industry – with claims incurred showing the biggest adjustment with an additional $490 million allocation that boosted total claims costs for last year to $19.5 billion. The revision to the numbers came about due to the refiling of one insurer’s results for last year and the collection of late filed data, he adds.