NEW YORK, June 22, 1998 — Two special factors — lower catastrophe losses and large capital gains — helped boost the U.S. property/casualty industry's surplus, or net worth, by $54.7 billion to an all-time high of $310.2 billion, making 1997 a banner year for insurers, according to a just-released study by Insurance Services Office, Inc. (ISO).
The ISO Insurance Issues Series study, "Insurer Financial Results: 1997," reports that the property/casualty industry's net income after taxes in 1997 jumped 45.7 percent to a record $35.6 billion from the corresponding period in 1996. The industry's Generally Accepted Accounting Principles (GAAP) rate of return on average net worth improved to 11.3 percent from 9.3 percent in 1996.
Insurers' stocks had a stellar run-up in 1997, as well. Investors in the Standard & Poor's (S&P) property/casualty insurance index and the S&P multi-line insurance index earned total rates of return of 45.4 percent and 52.5 percent, respectively. The S&P 500, by comparison, returned 33.3 percent overall.
The industry's statutory combined ratio — a key measure of losses and other expenses per dollar of premium — improved to 101.7 percent last year from 105.8 percent in 1996.
"Property/casualty insurers' overall 1997 results were outstanding. Wall Street played a vital role, but a significant drop in underwriting losses also contributed to the excellent results," said John J. Kollar, ISO's vice president— actuarial services and research.
"While significantly improved from 1996, no one should read too much into a single year's performance," cautioned Kollar. "Much of the improvement in underwriting results is attributable to a fortuitous decline in catastrophe losses, to $2.6 billion in 1997 from $7.3 billion in 1996."
Several factors may explain the superior performance of insurance stocks in 1997, despite the property/casualty industry's relatively low GAAP rates of return when compared to other industries, Kollar said. He cited the study's segment analyses that showed stock insurers as more profitable than the industry overall. In addition, insurers' rate of return on an economic basis was 14.8 percent — 3.5 percentage points higher than their GAAP rate of return. Economic rates of return, one measure of profitability particularly relevant to investors, include all unrealized gains or losses in income, even though developments in financial markets could later eliminate such gains or losses.
"Also, the increase in mergers and acquisitions in the industry may have led some investors to place a premium on insurance stocks," Kollar said.
The industry's underwriting loss declined to $6.1 billion in 1997 from $16.7 billion in 1996. The effect of "anemic" premium growth — only 3.3 percent in 1997 — on underwriting profitability was more than offset by a decline in incurred loss and loss-adjustment expenses, noted Kollar.
"Much of the 1997's 4 percent decline in loss and loss-adjustment expenses resulted from lower catastrophe losses and a reduction in newly-recognized environmental and asbestos (E&A) losses," Kollar said. Estimated E&A losses dropped to $1.9 billion from $5.1 billion in 1996.
The industry's net investment income surged to a record $41 billion, up 8 percent from 1996, largely because two insurers received special dividends as affiliated life insurance operations were spun-off. "Excluding those special dividends, and the effects of an accounting change, the industry's net investment income grew 3.1 percent in 1997," Kollar explained.
The industry also benefited from record realized capital gains last year, up 15.8 percent to $10.7 billion, after having increased 54.1 percent in 1996. Total capital gains — realized and unrealized — for the industry jumped 78.4 percent to $40.2 billion, up from $22.5 billion in 1996. "For the three years 1995 to 1997 combined, the property/casualty industry's total capital gains amounted to $90.5 billion, reflecting financial market's strength," Kollar observed.
Despite the flurry of mergers and acquisitions last year, the property/casualty industry remains far from concentrated, the study says. And, even though the industry has become more concentrated on an all-lines basis, the markets for some individual lines, in particular, workers compensation, medical malpractice, commercial auto and commercial multi-peril, were less concentrated in 1996, the latest year for which there is complete data, than they were in 1980, according to Kollar.
Partly because of mergers and acquisitions in the industry, employment has declined in recent years. "Last year, industry employment stood at 531,000, down 5.5 percent from 562,000 in 1991. And, while long-term trends indicate that output per employee has increased substantially, increases in labor costs have outpaced productivity gains," added Kollar.