NEW YORK, June 7, 1999 – A tripling of net losses on underwriting and a decline in net investment income contributed to a 3.6 percent drop in the U.S. property/casualty industry's first-quarter 1999 net income after taxes to $9.2 billion, from $9.5 billion in first-quarter 1998, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).
The industry's net underwriting loss amounted to $2.9 billion for first-quarter 1999, triple the $0.9 billion in first-quarter 1998. In addition, the industry's net investment income declined to $9.6 billion in the first quarter of 1999 from $9.7 billion in the first quarter of 1998. An increase in the industry's realized capital gains and a decline in its federal income taxes partially offset these adverse developments.
Weak premium growth and higher incurred loss and loss-adjustment expenses led to the deterioration in underwriting results. Industry net written premiums for first-quarter 1999 were $71.9 billion, up just 1.6 percent from $70.7 billion in the year-ago period. The 1.6 percent written premium growth for first-quarter 1999 is down from first-quarter written premium growth rates of 2.2 percent for 1998 over 1997 and 3.6 percent for 1997 over 1996. Industry loss and loss-adjustment expenses rose to $51.4 billion in the first quarter of 1999, an increase of 4.1 percent from $49.4 billion a year ago. The 4.1 percent increase in loss and loss-adjustment expenses for first-quarter 1999 compares with a 0.3 percent increase in first-quarter 1998 and a 4.7 percent decline in first-quarter 1997.
The figures are consolidated estimates for the entire industry based on the reports of insurers that account for 96 percent of the U.S. property/casualty business.
"The 1.6 percent increase in the first quarter of 1999 was the lowest first-quarter premium growth rate since 1992, which stands in contrast to the strength in the economy overall," noted John Kollar, ISO vice president for consulting and research. "In the first quarter of 1999, the nation's gross domestic product – a broad measure of economic activity – rose 5 percent compared to the first quarter of 1998. This is the eighth year in a row that first-quarter written premium growth has trailed the growth in gross domestic product," added Kollar.
The first-quarter combined ratio – a measure of losses and underwriting expenses per dollar of premium – was 103 percent, 2.8 percentage points worse than the industry's 100.2 percent combined ratio in the same quarter a year ago.
"Perhaps more disturbing is that while premium growth has slowed, catastrophe and non-catastrophe losses have increased," observed Diana Lee, the NAII's vice president for research services. "The increase in catastrophe losses only accounts for 1.2 percentage points, or less than half, of the deterioration in the industry's combined ratio. Premium growth that did not keep pace with increases in non-catastrophe losses and other costs accounts for the remainder of the deterioration in the combined ratio," added Lee.
According to ISO's Property Claim Services unit, first-quarter 1999 catastrophe losses totaled $1.8 billion, up 83.6 percent from $1 billion in first-quarter 1998. Other loss and loss-adjustment expenses rose to $49.6 billion in first-quarter 1999, up 2.5 percent from $48.4 billion in the year-earlier period.
The industry's pre-tax operating income – the sum of its gain or loss on underwriting, net investment income, and other miscellaneous income – declined 22.2 percent to $6.7 billion in the first quarter of 1999 from $8.6 billion in the period a year ago. The effect of the decline in operating income on the industry's after-tax net income was partially mitigated by an increase in the industry's realized capital gains – $5 billion in first-quarter 1999, up from $4.3 billion in first-quarter 1998 – and a fall in its federal income taxes, which were $2.5 billion in first-quarter 1999, down from $3.4 billion in first-quarter 1998.
The underwriting loss in first-quarter 1999 amounted to 4.2 percent of the $68.9 billion in premiums earned during the quarter, up from 1.3 percent of the $67.8 billion in premiums earned during the first quarter of 1998. The underwriting loss in the first quarter of 1999 included $634 million of premiums returned to policyholders as dividends, up from $513 million in the first quarter of 1998.
The industry's pre-tax net investment gain, which combines net investment income (primarily dividends earned from stocks and interest on bonds) and realized capital gains, rose to$14.6 billion in first-quarter 1999, up from $13.9 billion in first-quarter 1998.
"To some extent, the decline in the industry's investment income reflects declines in interest rates," noted Kollar. "For example, the average yield on 10-year Treasury bonds fell to 5 percent in the first quarter of 1999 from 5.6 percent in the first quarter of 1998 and 6.6 percent in the first quarter of 1997. While some people might be looking forward to higher interest rates that would benefit insurers' investment income, higher rates could spell the end of the run-up in stock and bond prices that has enabled insurers to post substantial capital gains."
Insurers' total capital gains – the sum of their realized capital gains and unrealized capital gains – fell to $3.8 billion in first-quarter 1999 from $17.8 billion in first-quarter 1998, reflecting developments in financial markets. From beginning to end of this year's first quarter, interest rates rose and bond prices declined – unlike the trends in interest rates and bond prices in early 1998. The S&P 500 index of common stock prices rose 4.6 percent in first-quarter 1999 – only about one-third of the 13.5 percent increase in first-quarter 1998.
The industry's consolidated surplus – its assets minus liabilities – increased $3.7 billion to $337.2 billion as of March 31, 1999, up 1.1 percent from $333.5 billion at year-end 1998. Additions to surplus included $6.7 billion of operating income, $5 billion of realized capital gains, and $2.3 billion of new funds. Charges against surplus included $2.5 billion of income taxes, $2.4 billion in stockholder dividends, $1.2 billion of unrealized capital losses, and $4.1 billion of miscellaneous surplus changes.
"The increase in the industry's surplus in first-quarter 1999 approximately equaled the industry's total capital gains during the period, and the amount of new funds raised by insurers was also approximately equal to the amount they paid in dividends to stockholders," said Lee. "Clearly, the industry's income from ongoing operations was barely enough to cover its federal income taxes and miscellaneous charges against surplus. Should interest rates rise and stock prices fall, the industry may experience capital losses and declines in surplus," added Lee.
OPERATING RESULTS FOR 1999 AND 1998
|NET WRITTEN PREMIUM||71,859||70,715|
|NET EARNED PREMIUM||68,916||67,815|
|INCURRED LOSS & LOSS-ADJUSTMENT EXPENSE||51,403||49,365|
|STATUTORY UNDERWRITING GAIN (LOSS)||(2,237)||(361)|
|NET UNDERWRITING GAIN (LOSS)||(2,871)||(874)|
|PRE-TAX OPERATING INCOME||6,692||8,604|
|NET INVESTMENT INCOME EARNED||9,601||9,651|
|NET REALIZED CAPITAL GAIN (LOSS)||4,993||4,273|
|NET INVESTMENT GAIN||14,594||13,924|
|NET INCOME AFTER TAXES||9,173||9,515|
|COMBINED RATIO, POST-DIVIDENDS||103.0||100.2|
Michael R. Murray (ISO)
Sue McKenna (NAII)
Loretta Worters (III)