Property/Casualty Industry's Surplus Drops as net Income Tumbles and Capital Losses Mount

NEW YORK, Dec. 7, 1999 – The surplus, or statutory net worth, of the U.S. property/casualty industry fell $9.9 billion during the first nine months of 1999, dropping to $323.4 billion as of September 30, 1999, from $333.3 billion at year-end 1998, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII). The industry's net income after taxes through nine-months 1999 fell to $17.7 billion – down$5.6 billion, or 24.1 percent, from $23.3 billion through nine-months 1998.

The industry's income barely offset unrealized capital losses on insurers' investments. Such losses grew to $15.7 billion during the first nine months of 1999 from $10.6 billion during the corresponding period in 1998.

The drop in surplus through nine-months 1999 was the first such drop since 1990. If not for the $5.6-billion decline in net income and the $15.7 billion in unrealized capital losses, surplus would have risen by $11.4 billion during the first nine months of 1999, instead of declining by $9.9 billion. Other factors contributing to the change in surplus through nine-months 1999 included $1.8 billion in new funds paid in, $3.0 billion in miscellaneous charges against surplus, and $10.7 billion in dividends paid to stockholders.

"Escalating losses on underwriting, declining investment income, a decrease in realized capital gains, and losses on other operations combined to cause the 24.1 percent decline in the industry's net income after taxes through nine-months 1999. If there is a bright spot in the industry's performance, it is third-quarter premium growth," said John J. Kollar, ISO's vice president for consulting and research. "Premiums through nine-months 1999 were up only 1.8 percent compared with premiums through nine-months 1998, but premiums for just third-quarter 1999 were up 3.4 percent compared with year-ago levels. While still weak, premium growth on a quarterly basis last exceeded 3 percent in second-quarter 1997," added Kollar.

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 industry's net loss on underwriting grew by $5.3 billion, or 51.8 percent, to $15.4 billion for nine-months 1999, up from $10.2 billion for nine-months 1998. The industry's net investment income (primarily dividends earned from stocks and interest on bonds) fell by 3.3 percent to $28.4 billion for nine-months 1999 from $29.3 billion for nine-months 1998. Realized capital gains on insurers' investments declined to $10.9 billion through nine-months 1999 from $12.1 billion through nine-months 1998. The industry's income from other operations through nine-months 1999 amounted to a $1 billion loss, compared with a $0.3-billion gain during the first nine months of 1998. A decline in the industry's federal income taxes partially offset these unfavorable developments. Federal income taxes dropped to $5.1 billion for nine-months 1999 from $8.3 billion for nine-months 1998.

The industry's pre-tax operating income – the sum of its gain or loss on underwriting, net investment income, and other miscellaneous income – declined 39 percent to $11.9 billion in the first nine months of 1999 from $19.5 billion in the same period a year ago.

Weak premium growth and increased loss and loss-adjustment expenses contributed to the 51.8 percent increase in net losses on underwriting. Industry net written premiums through nine-months 1999 were $218 billion, up just 1.8 percent from $214.1 billion a year ago. The 1.8 percent written premium growth rate through nine-months 1999 is down from 2 percent through nine-months 1998 and 3.3 percent through nine-months 1997. Industry loss and loss-adjustment expenses rose to $164.2 billion during the first nine months of 1999, up 4.6 percent from $157 billion during the first nine months of 1998. The 4.6 percent increase in loss and loss-adjustment expenses for nine-months 1999 compares with a 5.8 percent increase for nine-months 1998 and a 4.3 percent decline for nine-months 1997.

"Even with limited improvement in premium growth in the third quarter, the 1.8 percent growth in written premium through nine-months 1999 ties the record low for written premium growth through nine months set in 1992. With three quarters of 1999 already history, it is unlikely that growth for all of 1999 will be much above the record low for full-year premium growth set in 1998, which also happened to be 1.8 percent," observed Diana Lee, the NAII's vice president for research services.

"The industry's top-line revenue growth remains poor even though we are enjoying one of the longest and strongest periods of economic growth in the nation's history. In the first nine months of 1999, the nation's gross domestic product, adjusted for inflation, rose 4 percent compared with the level one year ago, and the civilian unemployment rate fell to an average of just 4.3 percent," added Lee.

The nine-month combined ratio – a measure of losses and underwriting expenses per dollar of premium – was 106.4 percent, 2.3 percentage points worse than the industry's 104.1 percent combined ratio for nine-months 1998 and 5.3 percentage points worse than the 101.1 percent combined ratio for nine-months 1997.

Net losses on underwriting through nine-months 1999 amounted to 7.3 percent of the $211.1 billion in premiums earned during the period, up from 4.9 percent of the $207.8 billion in premiums earned during the first nine months of 1998. The underwriting loss in the first nine months of 1999 included $1.8 billion of premiums returned to policyholders as dividends, down from $3 billion in the first nine months of 1998.

"Underwriting results would have been even worse were it not for a decline in catastrophe losses," observed Kollar. "Absent the decline in catastrophe losses, the industry's combined ratio through nine-months 1999 would have been 107.2 percent – nearly a full percentage point worse than the actual combined ratio," he said.

According to ISO's Property Claim Services (PCS) unit, catastrophe losses through nine-months 1999 totaled $7.9 billion, down 17.7 percent from $9.6 billion through nine-months 1998. Other loss and loss-adjustment expenses rose to $156.3 billion during the first nine months of 1999, up 6 percent from $147.4 billion during the corresponding period a year ago.

"Even with the decline in catastrophe losses during the first nine months of 1999, they remained far worse than average," said Kollar. "Taking inflation into account, nine-month catastrophe losses were higher in just 3 of the 50 years from 1949 to 1998," added Kollar.

The negative effects of weak premium growth and rising losses were compounded by deterioration in investment results. The industry's pre-tax net investment gain (the sum of net investment income and realized capital gains) fell by $2.1 billion to $39.3 billion for the first nine months of 1999, down from $41.4 billion for the corresponding period in 1998. The decline in the industry's pre-tax investment gain reflects weakening in both investment income and realized capital gains. Net investment income through nine-months 1999 fell $1 billion compared to net investment income through nine-months 1998. Realized capital gains through nine-months 1999 dropped by $1.2 billion compared to realized capital gains during the same period in 1998.

Combining realized capital gains and unrealized capital losses, the insurance industry suffered $4.8 billion in total capital losses through nine-months 1999, compared with $1.5 billion in total capital gains through nine-months 1998.

"The decline in net investment income during the first nine months of 1999 is a delayed reflection of the downward trend in interest rates from 1994 to 1998. The average yield on 10-year U.S. Treasury bonds fell to 5.3 percent in 1998 from 7.1 percent in 1994," said Lee. "But, on a month-to-month basis, there has been an upward trend in interest rates since the end of last year, with the average yield on 10-year Treasury bonds rising from 4.7 percent in December 1998 to 6.1 percent in October 1999. If the upward trend in interest rates persists, we may soon see increases in the industry's investment income," added Lee.

"The industry's total capital losses through nine months stand in contrast to the upward trend in stock prices during the period," noted Kollar. "The Standard & Poor's 500 index of common-stock prices rose 4.4 percent in the first nine months of this year. One concern going forward is the possibility that increases in interest rates will lead to declines in stock prices and further capital losses for insurers," commented Kollar.

Third-Quarter Results

The industry's third-quarter 1999 net income after taxes was $2.5 billion, compared with$7.6 billion in third-quarter 1998 and $6.1 billion in second-quarter 1999.

Net income for third-quarter 1999 consisted primarily of $0.7 billion in pre-tax operating income and $2.7 billion in realized capital gains. The industry incurred $0.9 billion in federal income taxes in the third quarter of 1999, 58.9 percent less than the $2.3 billion incurred in third-quarter 1998.

The industry's third-quarter 1999 pre-tax operating income of $0.7 billion was down 88.4 percent from $6.2 billion in the same period a year ago. Third-quarter 1999 operating income consisted of a $7.5-billion loss on underwriting,$9.4 billion in net investment income, and $1.2 billion in miscellaneous losses on other operations.

The third-quarter pre-tax underwriting loss of $7.5 billion was 80.2 percent more than the $4.2-billion underwriting loss in the third quarter of 1998. Overall losses on underwriting increased despite a fall in catastrophe losses to $2.6 billion in the third quarter of 1999 from $4.1 billion in the third quarter of 1998, as reported by ISO's PCS unit.

The third-quarter 1999 underwriting loss represents 10.4 percent of $71.8 billion in earned premiums, up from 6 percent of $69.9 billion in earned premiums during the third quarter of last year. The underwriting loss in the third quarter of 1999 included $0.6 billion of premiums returned to policyholders as dividends, down from $0.8 billion in third-quarter 1998.

The $9.4 billion of net investment income for the third quarter of 1999 was down 4.1 percent from $9.8 billion in the same period a year ago. Realized capital gains for third-quarter 1999 were $2.7 billion, compared with $3.6 billion in third-quarter 1998. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $12.1 billion in 1999's third quarter, compared with $13.4 billion in 1998's third quarter.

Written premiums totaled $74.6 billion for third-quarter 1999, up 3.4 percent from $72.2 billion for third-quarter 1998. That compares with third-quarter written premium growth of 1.5 percent for 1998 over 1997 and 2.3 for 1997 over 1996.

OPERATING RESULTS FOR 1999 AND 1998
($ Millions)

NINE MONTHS 1999 1998
NET WRITTEN PREMIUM 218,017 214,081
NET EARNED PREMIUM 211,053 207,797
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE 164,168 156,969
STATUTORY UNDERWRITING GAIN (LOSS) (13,637) (7,221)
POLICYHOLDERS' DIVIDENDS 1,806 2,955
NET UNDERWRITING GAIN (LOSS) (15,443) (10,176)
PRE-TAX OPERATING INCOME 11,880 19,480
NET INVESTMENT INCOME EARNED 28,368 29,334
NET REALIZED CAPITAL GAIN (LOSS) 10,918 12,070
NET INVESTMENT GAIN 39,286 41,403
NET INCOME AFTER TAXES 17,665 23,285
SURPLUS (CONSOLIDATED) 323,446 310,517
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES 364,675 366,271
COMBINED RATIO, POST-DIVIDENDS, PERCENT 106.4 104.1
THIRD QUARTER 1999 1998
NET WRITTEN PREMIUM 74,642 72,196
NET EARNED PREMIUM 71,847 69,877
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE 58,115 53,523
STATUTORY UNDERWRITING GAIN (LOSS) (6,855) (3,336)
POLICYHOLDERS' DIVIDENDS 638 822
NET UNDERWRITING GAIN (LOSS) (7,492) (4,158)
PRE-TAX OPERATING INCOME 725 6,241
NET INVESTMENT INCOME EARNED 9,377 9,775
NET REALIZED CAPITAL GAIN (LOSS) 2,736 3,617
NET INVESTMENT GAIN 12,113 13,393
NET INCOME AFTER TAXES 2,532 7,598
SURPLUS (CONSOLIDATED) 323,446 310,517
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES 364,675 366,271
COMBINED RATIO, POST-DIVIDENDS, PERCENT 109.4 105.0
 

Release: Immediate

Contacts:
Michael R. Murray (ISO)
201-469-2339
mmurray@iso.com

Sue McKenna (NAII)
(847) 297-7800

Loretta Worters (III)
(212) 669-9200