Underwriting losses plague U.S. insurers

U.S. property and casualty insurers saw their net income for the first nine months of last year fall by 5% to US$16.5 billion compared with US$17.4 billion reported for the same period in 1999, according to the Insurance Services Office INC. (ISO) and the National Association of Independent Insurers (NAII). The industry’s earnings plunge – largely resulting from significantly higher underwriting losses – produced a 6.7% return on investment (ROI).

Although net written premium income for the reporting period rose by 4.6% year-on-year, with net earned premiums gaining 3.8%, insurers were heavily hit by a sharp rise in general underwriting losses despite a drop in catastrophic claim costs. The industry’s net underwriting loss for the three quarters climbed by 44% to US$22 billion. The poor underwriting performance resulted in the combined ratio clocking in at 108.9% compared with the 106.3% reported at the end of September 1999. “The 108.9% combined ratio for the first three quarters of this year is the worst nine-month underwriting result since the 110% in 1994, when the Northridge earthquake caused US$12.5 billion in losses. Catastrophic losses did not drive the deterioration in this year’s underwriting results. On the contrary, catastrophic losses through the nine months fell from US$8.1 billion in 1999 to US$3.5 billion,” remarks John Kollar, vice president of consulting and research at the ISO.

Although the industry’s improved investment performance for the first nine months helped offset its reduced operating income, the mismatch in the growth of underwriting expenses versus premiums will continue to hinder the ability of companies to regain acceptable returns, notes Diana Lee, vice president of research services at NAII. Net investment income for the nine months rose 2.2% to US$29.2 billion compared with US$28.6 billion for the year prior. Realized capital gains for the first three quarters of 2000 came in almost 30% higher at US$13.5 billion from the previous year’s US$10.4 billion. The industry’s surplus dropped marginally to US$327.3 billion compared with US$334.3 billion at the end of September 1999.

While the U.S. results for the first nine months of last year were far from satisfactorily, the financial returns of insurers do substantiate a view that the industry’s pricing cycle has shifted into positive gear, says Robert Hartwig, vice president and chief economist of the Insurance Information Institute (III). “The modest pace of the recovery suggests that insurers will likely experience an extended period of generally improving earnings in the years ahead, assuming normal levels of catastrophic losses”.

Hartwig points out that the industry’s ROE of 6.7% at the end of the first three quarters of 2000 is significantly better than the 5.6% return recorded at the half-year mark, as well as the 6.6% made for the whole of 1999. Pricing remains the “single most important factor,” he comments, with signs on both commercial and personal lines suggesting that a firming of rates is setting in. III research indicates that personal auto rates rose by 1.5% last year, with expectations that a further 2% to 4% increase will take hold in 2001. A survey recently carried out by the III of Wall St. analysts also confirms the belief that the U.S. insurance industry is entering a new growth period. Among the forecasts included in the survey is the view that insurers will notch up a 7% gain in net written premiums for 2001, while the combined ratio is expected to stabilize at around 108.7%.