Plummeting Loss Ratio Lifts U.S. Insurers’ 2003 Earnings

U.S. property and casualty insurers brought home a 9.4% ROE for the 2003 financial year on the back of a net profit of US$29.9 billion – reflecting nearly a 10 times increase on the US$3 billion in net income reported for 2002. Much of the profit gain made over last year arose from an 85% year-on-year decline in underwriting losses to US$4.6 billion from the US$30.8 billion loss recorded for 2002, according to industry data collected by the Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI).

The industry’s claims cost for 2003 rose moderately by 2.2% to US$289.8 billion compared with the US$283.6 billion disclosed the year prior. As a result, insurers’ combined ratio for last year clocked in at 100.1%, showing a 7.2 percentage point improvement on 2002’s result. The drop in the combined ratio was achieved despite the fact that catastrophe-related losses more than doubled year-on-year for 2003 to reach US$12.9 billion (2002: US$5.9 billion), observes the ISO’s vice president of consulting and research, John Kollar. “Had catastrophe losses remained the same as they were in 2002, the combined ratio would have improved all the way to 98.2%.”

Insurers saw net written premiums rise year-on-year by nearly 10% to US$405.9 billion for 2003, while net earned premiums grew annually by 11.4% to US$388.1 billion. On the investment side, the industry’s investment income rose year-on-year by 3.9% to US$38.7 billion (2002: US$37.2 billion) with realized gains soaring to US$6.9 billion from the previous year’s realized capital loss of US$1.2 billion. The industry’s pre-tax net investment gain (investment income and realized gains combined) for 2003 jumped by 26.6% to US$45.6 billion compared with the US$36 billion reported for the year prior.

As a result, insurers were able to boost total surplus by US$61.6 billion to reach US$346.9 billion (2002: US$285.4 billion). “The US$61.6 billion increase in surplus in 2003 follows declines in each of the previous three years. The declines in surplus from 2000 to 2002 totaled US$49 billion,” says Roger Kenney, assistant vice president of research at the PCI.

Robert Hartwig, chief economist at the Insurance Information Institute (III), cautions against being overly optimistic regarding insurers’ improved financial results for 2003. He notes that the 100.1% combined ratio reported by the industry produced a modest ROE compared with that of the “Fortune 500” companies. Notably, the last time insurers were able to generate an annual 100% combined ratio was in 1979, which resulted in an ROE of 15.5% – largely due to higher interest rates. As such, Hartwig believes the p&c insurance sector will continue to under-perform the “Fortune 500” during 2004. He is also wary that the industry’s profitability may spark unfounded public and political outrage. “…the 2003 results in general are likely to be misinterpreted, misconstrued and misused by the industry’s critic’s and some regulators to make a wide array of spurious, actuarially unsupported, and in some cases politically motivated arguments detrimental to insurers and ultimately policyholders.”