Underwriting trends: Canada goes north, U.S. south.

Although the optimistic whisper of higher premium pricing echoes along the company corridors of both the Canadian and U.S. property and casualty insurance industries, the first half-year underwriting results from both countries hint at caution. While the Canadian industry benefited this year from a robust investment environment – thereby offsetting underwriting losses – this gain is likely to prove a short-term windfall, with many of the underwriting and expense factors relating to both the Canadian and U.S. industries likely undermine real growth through into the 2001 financial year.

Now that the U.S. and Canadian property and casualty insurance industries first half-year financial results are in for 2000, it is hard not to draw stark comparisons in performance from the obvious business ratios. Both industries slogged through a drawn out soft market pricing cycle. However, the markets are now exhibiting some signs of underwriting firming, although increasing claims, adverse development in some lines of business, and expenses are continuing to erode income.

In the U.S., six-month results continue to exhibit effects of the prolonged soft market. Marked by unfavorable commercial reserve development and rapid erosion in personal auto results, the first-half of the year produced an industry combined ratio of 109.2%. At A.M. Best, we expect further deterioration in the second half of 2000, as insurers complete their more vigorous year-end loss reviews.

A.M. Best is projecting a year-end combined ratio of 110% for the U.S. market. We expect commercial price increases will be heavily offset by continued medical cost inflation, while personal auto margins will remain poor. As a result, A.M. Best believes the highly publicized price firming is unlikely to provide a soft landing for the U.S. industry in 2000, with results not expected to bottom out until early 2001.

A.M. Best’s data reveals that net premium growth of 4.4% during the first half of this year rose more rapidly than it has since 1993, while underwriting results deteriorated by 4.1 percentage points, despite lower catastrophe losses. Surplus declined 2.4%, which has not occurred for a full-year period since 1984, as flat investment income and realized gains failed to offset the combination of weak underwriting results, unrealized losses and shareholder dividends. These weak results impacted each of the industry’s major segments, across the personal, commercial and reinsurance lines.

Furthermore, rising loss costs have outpaced price increases, thereby creating negative margins on current business written, and therefore becoming the leading driver of loss-ratio deterioration ahead of reserve development, in contrast to the prevalence of loss reserve corrections in the latter half of 1999. Loss-cost inflation was the most pronounced in the personal auto sector. The cost of bodily injury claims has grown due to increasing medical costs. While the industry as a whole reported approximately US$3.7 billion in a favorable personal auto reserve development in 1999, favorable loss reserve development for all business lines has slipped to 65%, from $6.2 billion at yearend 1998. Moreover, during 2000, accident-year 1999 loss ratios are developing much worse than expected for many insurers.

U.S. catastrophe relief

Total U.S. industry catastrophe losses for the first half of 2000 were lower than in 1999, with catastrophe loses equaling US$3.1 billion for this year’s first six-month period compared with US$5.3 billion for the same period in 1999. Meanwhile the industry’s earnings drag resulting from asbestosis and environmental losses were flat.

And, in the meantime, the Canadian loss ratio has risen by two percentage points despite a 6.5% increase in premium writings. The six-month combined ratio for 2000 is now hovering around 106%, partially due to the fact that the increase in written premiums has not yet flowed though to earnings. While general expenses remained flat over the period, most of the deterioration in the combined ratio is due to increased losses in most provinces, particularly in the Maritimes and Saskatchewan.

Canadian realized gain

The industries in both countries exhibited similar increases in investment income over the same period last year. However, due to the surge in TSE values, Canadian insurers showed a massive increase in realized gains against the 10% decline shown in the U.S. figures.

Looking forward, the Canadian industry is likely to see realized gains for 2000 nearing their 1998 levels due to impressive profit taking. In 2001, however, A.M. Best expects gains to continue their decline from their 1997 peak. In addition, A.M. Best believes that after releasing $800 million from reserves in 1999, and similar redundancies in 1997 and 1998, that the slack in reserves has largely been exhausted, thereby putting additional strain on combined ratios in looking forward. As in the U.S., it has become a race between declining investment gains, diminishing prior year reserve redundancies, and the market’s hardening.