NEW YORK, Sept. 8, 1998 — The U.S. property/casualty insurance industry posted $15.9 billion in net income after tax for the first half of 1998, down 14.9 percent from $18.7 billion for first-half 1997, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).
The $15.9 billion in net income included $13.3 billion in operating income and $8.7 billion in realized capital gains. Operating income for the first half of 1998 was down 31 percent from $19.2 billion in first-half 1997. Realized capital gains increased 122.8 percent from $3.9 billion for the first half a year ago. Net investment income, together with realized capital gains, brought the industry's total pre-tax net investment gain for first-half 1998 to $28.1 billion, up 10.9 percent from $25.4 billion for first-half 1997.
The industry incurred $6 billion in income taxes in first-half 1998, 37.2 percent more than the $4.4 billion in income taxes for first-half 1997.
The figures are consolidated estimates for the entire industry based on the reports of insurers that account for more than 96 percent of the country's property/casualty insurance business.
According to ISO's Property Claim Services unit, catastrophe losses for first-half 1998 totaled $4.6 billion, compared with $1.8 billion in first-half 1997.
"Catastrophe losses in the first half of this year had a significant effect on the industry's bottom line," said John Kollar, ISO's vice president for actuarial services and research." The $2.8 billion increase in catastrophe losses matches the $2.8 billion decline in net income after tax. And, all but $1 billion of the $4.6 billion in first-half catastrophe losses were incurred during the April-to-June period." added Kollar.
"Adjusting for inflation, the first half of 1998 was the third-worst first half for catastrophe losses in the last 20 years," added Diana Lee, the NAII's vice president for research services." Tornadoes caused $4 billion, or 87 percent, of the catastrophe losses during first-half 1998."
The industry's $13.3 billion in pre-tax operating income through six-months 1998 included a pre-tax underwriting loss of $6 billion and pre-tax net investment income of $19.4 billion. The pre-tax underwriting loss for the period was more than 2.5 times the $2.2 billion loss during the comparable period in 1997. Had catastrophe losses remained the same as they were in first-half 1997, the industry's pre-tax underwriting loss for first-half 1998 would have still risen 45.5 percent to $3.2 billion.
As a result of worsening loss experience, the combined ratio — a measure of losses and other expenses per dollar of premium — deteriorated to 103.6 in first-half 1998 from 100.7 in first-half 1997." This unfavorable development follows unusually good experience in the first quarter of the year, when the combined ratio was 100.2 — the best combined ratio for any quarter in more than a decade," said Lee.
The underwriting loss for first-half 1998 was 4.4 percent of earned premiums of $137.5 billion, 2.8 percentage points higher than the 1.6 percent underwriting loss on earned premiums of $133.9 billion for first-half 1997. The first-half 1998 underwriting loss reflected $2.1 billion of premiums returned to policyholders as dividends, an increase of 85.7 percent from $1.1 billion in first-half 1997.
Net written premium for first-half 1998 totaled $141.3 billion, up 1.9 percent from $138.7 billion in first-half 1997. The equivalent first-half written premium growth rate was 3.8 percent for 1997 and 3 percent for 1996.
"Industry premium growth remains below historical norms. The 1.9-percent increase in premiums during the first half of the year compares with premium growth averaging 8.2 percent per year from 1970 to 1997," observed Kollar.
"Industry premium growth also continues to lag growth in the overall economy. The nation's gross domestic product grew 5 percent from the first half of 1997 to the first half of this year," said Lee.
The $19.4 billion of net investment income (primarily dividends earned from stocks and interest on bonds) was down 9.6 percent from $21.5 billion in 1997. The drop in investment income is not, however, representative of the experience of individual insurers, since the $21.5 billion in investment income in first-half 1997 included approximately $2.3 billion in special dividends received by two property/casualty insurers from affiliated life insurance companies. Excluding those special dividends, net investment income in first-half 1998 was 1.1 percent above net investment income in first-half 1997.
The industry's consolidated surplus — its assets minus liabilities — increased $25.7 billion, or 8.3 percent, to $334.2 billion as of June 30, 1998, from $308.5 billion at year-end 1997. Additions to surplus included $13.3 billion of operating income, $8.7 billion of realized capital gains, $16 billion of unrealized capital gains, and $2.2 billion of new funds. Charges against surplus included $6 billion of income taxes, $5.3 billion of stockholder dividends, and $3 billion in miscellaneous surplus changes.
"Much of the increase in surplus resulted from capital gains attributable to strong financial markets," Kollar commented. "The industry's total capital gains rose to $24.7 billion in first-half 1998 from $21.2 billion in first-half 1997. And, the Standard & Poor's 500 Index, a widely followed barometer of stock prices, increased 16.8 percent during the first half of this year."
"But, from the end of June to September 1, the S&P 500 index declined by 12.3 percent, reducing the run-up in stock prices since the start of the year to just 2.5 percent," noted Lee.
For the second quarter of 1998, the industry's consolidated net after-tax income was $6.4 billion, compared with net income of $8.5 billion in second-quarter 1997 and $9.5 billion of net income in the first quarter of 1998.
Net income for second-quarter 1998 consisted of pre-tax operating income of $4.6 billion and $4.4 billion of realized capital gains. The industry incurred $2.7 billion in income taxes in the second quarter of 1998, 23.3 percent more than the $2.2 billion incurred in second-quarter 1997.
The industry's second-quarter 1998 pre-tax operating income of $4.6 billion was down 48.3 percent from $9 billion a year ago. Second-quarter 1998 operating income consisted primarily of a pre-tax underwriting loss of $5.1 billion and pre-tax net investment income of $9.7 billion.
The second-quarter pre-tax underwriting loss of $5.1 billion was 511.4 percent more than the $0.8 billion underwriting loss in the second quarter of 1997. The decline in underwriting results coincided with a rise in catastrophe losses to $3.6 billion in the second quarter of 1998 from $1 billion in the second quarter of 1997, as reported by ISO's Property Claim Services unit.
The second-quarter 1998 underwriting loss represents 7.4 percent of $69.7 billion in earned premiums, up from 1.2 percent of $67.5 billion in earned premiums for the second quarter of last year. The underwriting loss in the second quarter of 1998 included $1.6 billion of premiums returned to policyholders as dividends, up from $0.6 billion in second-quarter 1997.
The $9.7 billion of net investment income for the second quarter of 1998 was down 2.5 percent from $10 billion in the same period a year ago. Realized capital gains for second-quarter 1998 were $4.4 billion, compared with $1.7 billion in second-quarter 1997. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $14.2 billion in 1998's second quarter, compared with $11.7 billion in the second quarter of 1997.
Written premiums totaled $70.6 billion for second-quarter 1998, up 1.6 percent from $69.5 billion for second-quarter 1997. This compares with second-quarter written premium growth rates of4.1 percent for 1997 over 1996 and 2.5 percent for 1996 over 1995.
OPERATING RESULTS FOR 1998 AND 1997
|NET WRITTEN PREMIUM||141,347||138,718|
|NET EARNED PREMIUM||137,486||133,868|
|INCURRED LOSS & LOSS ADJUSTMENT EXPENSE||102,830||98,296|
|STATUTORY UNDERWRITING GAIN (LOSS)||(3,876)||(1,063)|
|NET UNDERWRITING GAIN (LOSS)||(6,001)||(2,207)|
|PRE-TAX OPERATING INCOME||13,253||19,204|
|NET INVESTMENT INCOME EARNED||19,400||21,451|
|NET REALIZED CAPITAL GAIN (LOSS)||8,722||3,916|
|NET INVESTMENT GAIN||28,122||25,366|
|NET INCOME AFTER TAXES||15,932||18,714|
|COMBINED RATIO, POST-DIVIDENDS||103.6%||100.7%|
|NET WRITTEN PREMIUM||70,632||69,505|
|NET EARNED PREMIUM||69,671||67,493|
|INCURRED LOSS & LOSS ADJUSTMENT EXPENSE||53,466||49,076|
|STATUTORY UNDERWRITING GAIN (LOSS)||(3,515)||(225)|
|NET UNDERWRITING GAIN (LOSS)||(5,127)||(839)|
|PRE-TAX OPERATING INCOME||4,650||8,988|
|NET INVESTMENT INCOME EARNED||9,749||10,000|
|NET REALIZED CAPITAL GAIN (LOSS)||4,448||1,711|
|NET INVESTMENT GAIN||14,198||11,711|
|NET INCOME AFTER TAXES||6,417||8,524|
|COMBINED RATIO, POST-DIVIDENDS||107.0%||100.4%|
Michael R. Murray (ISO)