U.S. Insurers Benefit From 1-Q Underwriting Recovery

U.S. property and casualty insurers increased net taxed income for the first quarter of this year by more than 20% to US$6.4 billion compared with the US$5.3 billion reported for the same period a year ago, according to data collected by the Insurance Services Office Inc. (ISO) and the National Association of Independent Insurers (NAII). This translates to a return on equity of 8.8%.

The significant year-on-year profit rise for the latest quarter resulted primarily from pricing adjustments implemented last year which saw earned premiums outstrip the rise in claims costs with the industry’s underwriting loss falling by a dramatic 60% to US$1.5 billion from the US$3.6 billion incurred for the first quarter of 2002. Insurers’ net earned premiums grew year-on-year by 13.6% to US$93.6 billion for the first quarter of this year from the US$82.4 billion reported for the same period in 2002. Net written premiums rose by 12.7% for the latest reporting period to US$101.3 billion from last year’s first quarter tally of US$90 billion.

In contrast, the industry’s claims costs for the first quarter of this year increased by 10.7% to US$70 billion compared with the US$63.2 billion shown for the same period in 2002. The rise in claims costs include a hefty US$1.5 billion in catastrophe related losses which for the latest reporting period show a marked jump of 2.5 times the cat cost of US$600 million reported for the first quarter of 2002. The improvement in the underwriting loss for the latest quarter result saw the combined ratio drop to 99.5% from last year’s 102.2% ratio. The industry’s combined ratio would have clocked in at about 97% for the latest reporting period but for a large reserve adjustment made by one insurer during the period, observes John Kollar, vice president of consulting and research at the ISO.

Insurers were able to boost their total pre-tax investment gain (capital gains and investment income) by 7.6% year-on-year to just over US$10 billion for the first quarter of this year (2002 1-Q: US$9.3 billion). However, this modest recovery was driven by US$1.1 billion in realized capital gains while investment income deteriorated marginally to US$8.9 billion (2002 1-Q: US$9 billion).

“The first quarter of 2003 got property and casualty insurers off to their best start in years, setting the stage for what could become the industry’s first reasonably profitable performance since 1997, says Robert Hartwig, chief economist at the Insurance Information Institute (III). His comment refers to the 8.8% ROE achieved for the latest reporting period which stands in sharp contrast to the dismal 1% return for the 2002 financial year and the record-low negative return of 2.4% for 2001.

Although the industry was able to bring its combined ratio down to 99.5% for this year’s first quarter, the weak investment environment requires a far greater reduction in operating costs in order to achieve the necessary 15% ROE expected by shareholders. The fact that the industry only managed to produce an 8.8% ROE for the latest reporting period on the back of a combined ratio of less than 100% is indicative of the negative impact the investment environment has had on insurers’ returns, he adds.

Insurers also have to address the ongoing rise in claims costs, Hartwig says. Although claims costs lagged growth in earned and written premiums for the latest reporting period, this increase remains significantly higher than the annual growth in U.S. gross domestic product (GDP) of 3.8%, as well as the 2.9% rate of inflation. “This strongly suggests that there are still underlying problems with claim frequency and severity in many lines of insurance that need to be addressed.”