Insurers’ ROE Bounces Back to 10% for 2003

Property and casualty insurers finished the 2003 financial year with a return on equity (ROE) of 10.7%, according to initial data released by the Insurance Bureau of Canada (IBC). The latest full-year return reflects a nine percentage point improvement in ROE on the meager 1.7% return posted for the 2002 financial year. Notably, the top 25% rank of companies generated a ROE of around 26% for last year.

Jane Voll, chief economist at the IBC, told attendees at Swiss Reinsurance Co. Canada’s annual “Statistical Breakfast” that the bureau is still in the process of finalizing much of the financial data for the fourth quarter of 2003. As such, she did not reveal dollar amounts regarding the industry’s performance for either the last quarter or the full year, but provided a brief outline based primarily on financial ratios which all pointed in a positive direction for insurers in the year ahead.

Notably, insurers ended the 2003 financial year with a positive reserve development, thus reversing several years of capital and profit erosion resulting from large adverse reserve adjustments. Voll observes that the industry has been in a “six-year losing streak…there has been nothing like it since 1978”. Nearly all lines of business showed marked improvement in underwriting during 2003, Voll says, although the mandatory auto product is still a problem in most provinces. Auto and the liability lines both purportedly produced combined ratios in excess of 100% for 2003. Claims costs across the industry remain in the double-digit range, Voll adds.

However, the overall stronger underwriting performance of insurers saw the industry’s combined ratio drop to 98.7% for last year compared with the 106.5% ratio reflected at the end of 2002. Voll notes that 2003 also saw several large catastrophe losses such as the B.C. forest fires, which now stands as Canada’s third largest natural insured cat loss. Insurers also had to carry a $200 million loss from the Facility Association. Furthermore, Voll cautions that the performance of companies based on the combined ratio varies greatly from company to company, with some insurers producing a ratio in the lower end of the 90% scale while others are operating on ratios in excess of 150%.

Insurers were able to lift net earned premiums by 24% year-on-year for 2003. The IBC did not at the time of this writing provide any detail on the growth in net written premiums. Investment income remains under pressure, Voll says, with interest rates in the short- to medium-term likely to remain low. Realized gains accounted for about half of the industry’s investment return reported for 2003, she notes. As such, pressure will remain on earnings for the foreseeable future as the investment environment remains weak, she says. However, Voll is optimistic of 2004 producing additional advancement in the industry’s ROE due to further strengthening in underwriting.