U.S. insurers show life signs in first quarter

The U.S. property and casualty insurance industry displayed signs of a rebound in the first quarter of 2002, producing a 6.9% return on equity (ROE) following its worst ever year in 2001.

Coming off a negative 2.7% ROE for last year, insurers began to turn the tide on underwriting, if not on the investment side. Net income for the latest quarter fell 7.3% largely as a result of declining investment returns, according to results from the Insurance Services Office (ISO) and the National Association of Independent Insurers (NAII). Net income amounted to US$5.1 billion for the first quarter of this Year compared with US$5.5 billion for the same period last year. The industry’s underwriting loss dropped 38% year-on-year to US$3.8 billion against the US$6.1 billion posted for the first quarter of 2001.

Poor investment performance plagued the industry, with pre-tax net investment gains falling 26.4% to US$9.3 billion for the latest reporting period. Net investment income also fell to US$8.9 billion from US$9.5 billion, with realized capital gains down 88.8% to US$400 million from the previous year’s US$3.2 billion. “Low interest rates and the weakness in stock markets suggest that investment results may continue to deteriorate for some time to come,” says John Kollar, vice president of consulting & research at the ISO.

However, given that 2001 saw U.S. insurers reporting their first ever annual net loss, first quarter 2002 does indicate a turnaround on the underwriting side. During this period, net written premiums were up to US$90.3 billion against US$81.9 billion a year prior. Earned premiums were up 8.1% to US$82.9 billion for the first quarter of this year versus US$76.7 billion during the same period last year. This outpaces a 4.8% increase in claims costs of US$63.7 billion from last year’s US$60.8 billion. First quarter 2001, by comparison, saw loss and loss adjustment expenses increase 9.3%. If this pace continues, 2002 could see the lowest underwriting loss since 1997, notes Robert Hartwig, chief economist for the Insurance Information Institute (III).

The industry’s combined ratio improved for the first quarter of 2002 to 102.3% from 106.1% in first quarter 2001. But, the rate hardening being witnessed across the board may not be enough, suggests Hartwig. “The cost of managing risk for U.S. corporations plummeted by 42% between 1992 and 2000, but rose by an estimated 15% last year with a further increase of 30% expected this year,” he adds. “The long overdue return to risk-sensitive pricing accounts for most of the 10.3% increase in net written premiums during the first quarter, but it is not sufficient to drive down combined ratios to the 95% to 97% level most insurers require to achieve reasonable rates of return (e.g., 12%).”