U.S. insurers post 9.4% ROE for 2003

U.S. property and casualty insurers showed a strong comeback in 2003, posting a return on equity (ROE) of 9.4%, according to new date from the Insurance Services Office (ISO) and Property Casualty Insurance Association of America (PCI). However, this was shy of the pace set by Canadian insurers at 11.4%.U.S. insurers have struggled the past two years, posting returns of negative 2.3% in 2001 and positive 1.1% in 2002. Calling the results “a parting of the sea of red ink”, the Insurance Information Institute (III) says premium increases and more disciplined underwriting combined with stronger investment gains to produce 2003’s turnaround. The industry turned in net after-tax income of US$29.9 billion, against the US$2.9 billion earned in 2002.Among the indicators of a strong 2003 performance is the 21.6% jump in policyholder surplus, to a record-high of $347 billion at the end of 2003. Year-on-year, net written premiums were up 9.8%, and earned premiums grew to US$388.1 billion from the US$348.2 billion reported a year earlier. Underwriting losses fell 85%, to US$8.1 billion last year from US$30.8 billion the year prior. Between 2000 and 2002, the industry posted underwriting losses totaling US$137 billion.Overall, the industry produced a pleasantly surprising combined ratio of 100.1% in 2003, compared to 107.3% in 2002, and 115.7% in 2001. In fact, 2003’s combined ratio was the best since 1979.As well, investment results improved in 2003, with the industry realizing US$6.9 billion in capital gains, versus a loss of US$1.2 billion in 2002. Investment income was up slightly for 2003, to US$38.7 billion from US$36.7 billion in 2002. Despite these strong results, it is much too early to celebrate the industry’s success, says Robert Hartwig, chief economist of the III. “While celebrating the industry’s return to a reasonable level of profitability in 2003 is tempting, it is generally ill-advised and inappropriate for two reasons,” he says. “First, the results – while much improved – do not meet most generally-accepted benchmarks for profitability, falling well-short of the Fortune 500’s return of 12.6% last year. Second, the 2003 results in general are likely to be misinterpreted, misconstrued and misused by the industry’s critics 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.”In particular, Hartwig fears the level of policyholder surplus may be used to deter the federal government from renewing the Terrorism Risk Insurance Act (TRIA), which expires at the end of 2005. He notes the level of surplus must be seen in light of the expansion of the U.S. economy, the increased demand for insurance and the rise of new risks including environmental, terrorist, medical malpractice and corporate governance-related losses. “The combination of economic growth and greater demand for insurance along with new and emerging risks illustrates the fact that the industry’s policyholder surplus is fully committed.”Hartwig also stresses the relatively flat performance of insurers compared to other industries, which has “underwhelmed” investors and rating agencies, who still view the industry with a jaundiced eye. “For an amazing 17 consecutive years, in fact, p&c insurance industry profitability has trailed the Fortune 500. The 12.6% ROE chalked up by America’s largest corporations in 2003 leaves p&c insurers to ponder a 3.2-point profit deficit in a year in which strong premium growth and tough underwriting should have propelled the industry to a standout performance.”Hartwig expects 2004 will once again see the industry underperform relative to the Fortune 500.