NEW YORK–Falling interest rates and stalled premium growth mean the best returns on equity the property-casualty insurance industry can hope for in coming years will be high-single-digit returns, an expert said here.
Robert P. Hartwig, president of the New York-based Insurance Information Institute, delivered that message to a group of over 100 area actuaries at a meeting of the Casualty Actuaries of Greater New York yesterday.
"Interest rates are lower than they were a decade ago. They're falling and they're going to fall again," Mr. Hartwig said, noting that volatile stock market returns add to a bleak investment picture that has so far kept insurers focused on maintaining good underwriting results.
Mr. Hartwig said the industry is expected to earn roughly $60 billion from its investment portfolio in 2007 (a figure that includes interest on bonds, stock dividends as well as realized and unrealized capital gains). This figure is no better than it was a decade ago, he said, even though invested assets have grown in the intervening years.
Interest rates are much lower and stock market returns are much less generous, he explained.
That means "there's no way that poor underwriting and pricing decisions [can] be papered over" with investment earnings, he told the actuaries, noting that the phenomenal underwriting results of recent past years reflect, in part, the fact that insurers haven't been able to rely on investment gains as they did in past cycles.
Still, profitability has begun its "inexorable cyclical decline," he said.
Displaying a historical graph of insurer returns over several decades, Mr. Hartwig noted that industry profit peaks have occurred "almost like clockwork in the teens for 9-10 year intervals, followed by scary roller coaster rides for the next four-to-six years that take [results down] to the trough."
"If historical norms were to hold, then that would suggest that in 2011 we'd have a 1- or 2 percent return on equity," he said.
The hope, however, is that this cycle will be shallower than past cycles, he said, noting that factors like discipline, increased vigilance by such industry watchdogs as rating agencies and financial regulators, and healthier loss reserve positions could bring the cycle trough up from low-single-digit ROE levels to high-single-digits.
At the low-point of the last cycle, the industry ROE was actually negative, coming in at -1.2 percent in 2001.
For 2007, Mr. Hartwig said that overall ROE is expected to come in at about 13 percent, and that net income–in dollars–is expected to be about $63- or $64 billion, roughly equivalent to 2006.
The ROE peak of this cycle of 14 percent occurred in 2006–four years past the peak in premium growth that occurred in 2002.
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