As 2002 fades from memory as the worst performance year by the Canadian property and casualty insurance industry, 2003, on the other hand, will be remembered for the industry’s return to underwriting profitability and strong earnings, according to a statistical study from A.M. Best Co.

Although higher rates drove much of the improvement, the report also credits the industry’s return to sound underwriting guidelines, more conservative claims practices and attention to expense management.

The overall industry, excluding Insurance Corporation of British Columbia (ICBC), generated an underwriting ratio of 98.4 and an improved return on equity (ROE) of 12.4%. Underwriting profit for the year totalled $524 million.

The top 25 companies as ranked by direct premiums written generated an even better ROE of 12.9%, but modestly trailed in underwriting performance, earning an underwriting ratio of 99.6.

Further boosting industry underwriting earnings were favorable investment income and strong capital gains, which together increased by more than 30% over 2002.

The industry generated these positive results despite shouldering the costs of the B.C. forest fires, which were among the largest catastrophes in industry history, costing $250 million; losses from the Facility Association, a residual market, totaling %500 million; and losses from Hurricane Juan of %113 million, among others.

The report notes that auto insurance, particularly in Ontario, remains a drag on the overall industry’s performance, with no real relief in sight.

And there may be more trouble on the horizon. The reports says the big question looming is how long can the industry maintain the positive momentum and underwriting discipline without falling into a competition for market share.