NEW YORK, June 29, 1999 Record-low growth in premiums and a record decline in investment income, coupled with higher catastrophe losses, contributed to a sharp decline in the property/casualty industry's net income after taxes and overall profitability last year, according to Insurance Service Office, Inc.'s (ISO) just-published Insurer Financial Results: 1998 Insurance Issues Series study.
The ISO study reported that the industry's net income after taxes fell to $30.9 billion last year, down 16.1 percent from $36.8 billion in 1997. The industry's Generally Accepted Accounting Principles (GAAP) rate of return on average net worth dropped to 8.4 percent in 1998 from 11.6 percent in 1997. ISO estimates that the median GAAP return for Fortune 500 companies in 1998 was 14.4 percent. In 14 of the past 16 years, the median return for the Fortune 500 exceeded that of large insurers as well as the property/casualty industry as a whole.
"The anemic growth in the industry's net written premium a record low 1.4 percent and rising incurred losses and loss-adjustment expenses (LLAE) led to a tripling in the industry's net loss on underwriting," said John J. Kollar, ISO vice president consulting and research.
"Much of the increase in losses and loss-adjustment expenses resulted from higher catastrophe losses $10.1 billion in 1998, up from $2.6 billion in 1997," he added.
Going back to 1950, 1998 ranks as the third-worst year on record for catastrophe losses, even when ISO adjusts the data for inflation. Inflation-adjusted catastrophe losses during the 10 years from 1989 to 1998 totaled $99.5 billion more than twice the amount during the 39 years from 1950 to 1988.
The industry's combined ratio a key measure of losses and expenses per premium dollar deteriorated in 1998, rising 4 percentage points to 105.7 percent from 101.6 percent in 1997, according to the study. Reflecting the increase in the combined ratio, insurers' net loss on underwriting rose to$16.7 billion in 1998 nearly three times the $5.8 billion net loss on underwriting in 1997.
The ISO study reported that the industry's net investment income dropped a record 4.6 percent in 1998, falling for only the third time on record. The drop in investment income last year reflected special, nonrecurring dividends received by two insurers in 1997 as affiliated life-insurance operations were spun off. Even excluding those special dividends, the industry's investment income grew a meager 0.9 percent in 1998, which would have been the third-lowest growth rate for investment income on record.
ISO's study also revealed that the second consecutive record high in realized capital gains for the industry $18.6 billion, up from $10.8 billion in 1997 partially offset the deterioration in underwriting results and the decline in reported investment income.
The industry's surplus grew $25 billion, or 8.1 percent, to a record $333.5 billion at year-end 1998. Industry surplus has now risen for 14 consecutive years. Adjusted for inflation, surplus has risen for six consecutive years.
In recent years, capital gains have contributed substantially to growth in surplus. Reported surplus grew by $140.2 billion from year-end 1994 to year-end 1998, but excluding capital gains, surplus would have risen by only $31.3 billion. Much of the industry's capital gains during the past four years can be attributed to the strength in financial markets. The Standard & Poor's 500 index of common stock prices rose 27.9% per year from year-end 1994 to year-end 1998.
The industry's realized capital gains rose 72 percent to $18.6 billion in 1998. "The new record for realized capital gains may reflect decisions by some insurers to sell assets to raise cash and bolster income following higher catastrophe losses," said Kollar. "The sharp increase in realized capital gains may also be a result of mergers and acquisitions. When companies merge, they may need to change the mix of investments, triggering realization of capital gains," he noted.
According to Conning & Co. data cited in the ISO study, the number of property/casualty mergers and acquisitions climbed to 117 in 1998, eclipsing the previous record of 111 in 1997. "Despite the continuing flurry of mergers and acquisitions, the property/casualty industry has been consolidating slowly over time and remains far from concentrated," said Kollar.
ISO reported that the premium-to-surplus ratio fell to a record-low 0.84, and the LLAE reserves-to-surplus ratio also declined, dropping to 1.09 its lowest level since before 1970. "Leverage ratios provide a simple measure of the amount of risk supported by each dollar of surplus. But interpretation of leverage ratios is not straightforward," commented Kollar.
"The declines in leverage ratios in recent years may reflect declining prices in insurance markets and deteriorating reserve adequacy, as well as positive operating results and capital gains," Kollar noted, adding that the "decline in LLAE reserves to surplus ratio may also reflect a shift since 1992 in insurers' mix of business toward relatively short-tailed property lines."