U.S. Insurers Pull Slowly From the Red for 2002

U.S. property and casualty insurers disclosed net income of US$2.9 billion for the 2002 financial year compared with a net loss of US$7 billion reported the year before, according to data collected by the Insurance Services Office Inc. (ISO) and the National Association of Independent Insurers (NAII). The industry’s latest annual return translates to a disappointing return on equity (ROE) of 1%.

Although the industry’s net written premium and earned premium for 2002 rose year-on-year by 14.1% and 11.7% respectively to US$369 billion and US$348.1 billion, poor investment returns coupled with massive prior-year reserving adjustments eroded much of the price strengthening benefits. Notably, insurers’ underwriting loss for 2002 at US$30.5 billion is almost half the US$52.6 billion loss reported for 2001. As a result, the industry’s combined ratio eased back to 107.2% for 2002 compared with the 115.9% ratio shown for 2001. “While a decline in catastrophe losses certainly contributed to improvement in the industry’s combined ratio [for 2002], acceleration in premium played a bigger part,” observes Don Griffin, assistant vice president for business and personal lines at NAII.

The industry’s net investment income for 2002 slipped by 2.8% year-on-year to US$36.7 billion (2001: US$37.7 billion) while realized capital gains sank to a loss of US$1.1 billion compared with 2001’s realized gain of US$6.6 billion. The net result of investment income and the realized loss saw the industry’s overall investment gain drop by 20% for 2002 to US$35.5 billion (2001: US$44.3 billion).

The decline in investment returns served as the main driver resulting in a US$4.4 billion reduction in the industry’s capital surplus to US$285.2 billion at end 2002 (2001: US$289.6 billion).

Large reserve charges undermined the profitability of insurers for 2002, says Robert Hartwig, chief economist at the Insurance Information Institute (III). U.S. insurers generated about US$9.3 billion in net income for the first three quarters of 2002, he notes, which fell to US$2.9 billion by yearend. The disparity is the result of “massive charges” taken in the fourth quarter to strengthen reserves. “These charges added billions [of dollars] to 2002 underwriting losses.”