NEW YORK, June 26, 2000 — Near record low growth in premiums, increased loss and loss- adjustment expenses, declining investment income and lower realized capital gains led to deterioration in the property/casualty industry's net income after taxes and overall profitability last year, according to Insurance Services Office, Inc.'s (ISO) just-published "Insurer Financial Results: 1999" Insurance Issues Series study.
The ISO study reported that the industry's net income after taxes fell to $22.2 billion last year, down 28 percent from $30.8 billion in 1998. The industry's rate of return on average net worth dropped to 6.4 percent in 1999 from 8.5 percent in 1998, measured under Generally Accepted Accounting Principles (GAAP).
ISO estimates that the median GAAP return for Fortune 500 companies in 1999 was 16.5 percent, more than 10 points higher than both the rate of return for the property/casualty industry overall and the rate of return for large insurers.
Reflecting property/casualty insurers' decline in income and GAAP rate of return, the total rate of return for the S&P property/casualty index was a negative 25.4 percent in 1999, compared with a positive 21 percent for the S&P 500.
"Extremely poor growth in the industry's net written premium — a near record low 1.9 percent — and rising incurred losses and loss-adjustment expenses (LLAE) led to a nearly 40 percent increase in the industry's net loss on underwriting," said John J. Kollar, ISO's vice president — consulting and research. Insurers' net loss on underwriting ballooned by 39.5 percent to $23.4 billion in 1999 from $16.8 billion in 1998.
The ISO study reported that one key measure of financial leverage — the premium-to-surplus ratio — was virtually unchanged, edging up to 0.85 from a record low 0.84 in 1998. The industry's LLAE reserves-to-surplus ratio also changed little in 1999, falling to 1.08 from 1.10 the year before. "Taken together, slow premium growth, relatively weak profitability, and low leverage ratios suggest intense competition as a result of excess capacity," Kollar said.
The 4.9 percent increase in losses and loss-adjustment expenses occurred despite a decline in catastrophe losses, which decreased from $10.1 billion in 1998 to $8.3 billion in 1999.
ISO's preliminary estimates indicate that the adequacy of reserves for losses other than environmental and asbestos (E&A) losses deteriorated by between $5 billion and $13 billion in 1999, after deteriorating by similar amounts in 1998 and 1997. "Reported loss and loss-adjustment expenses would have risen even more were it not for the continued deterioration in the adequacy of loss reserves," Kollar observed.
According to the study, ISO estimates that insurers paid $5.4 billion in E&A LLAE in 1999 — the largest annual payout for E&A losses on record and $2.5 billion more than $2.9 billion in E&A LLAE newly incurred during the year.
"Insurers' E&A losses on policies written long ago have been emerging slowly over time, and the industry's ultimate tab for losses remains uncertain," said Kollar. "But the latest data suggests that the industry has recognized much of its ultimate liability and is now settling old E&A claims at an increasingly rapid pace," he added.
The industry's combined ratio — a key measure of losses and expenses per premium dollar — worsened in 1999, rising 2.2 percentage points to 107.9 percent from 105.6 percent in 1998, according to the study.
The ISO study reported that the industry's net investment income dropped 3.3 percent in 1999 to $38.6 billion, after falling by a record 3.8 percent in 1998 to $39.9 billion.
The decline in investment income last year reflects the decrease in the yield on cash and invested assets to 4.9 percent in 1999 from 5.1 percent the year before.
"The decline in investment income, coupled with weak premium growth and escalating LLAE, led to a sharp drop in the industry's operating cash flow to its lowest level since 1984 — the bottom of the worst underwriting cycle in history," said Kollar. Operating cash flow dropped to $11.9 billion in 1999 from $16 billion in 1998 and $31 billion in 1997.
The ISO study also reported that realized capital gains for the industry dropped by 24 percent to $13.7 billion, down from $18 billion in 1998. Still, the industry's realized capital gains in 1999 were the second largest on record, exceeded only by those the year before.
The industry's surplus grew $2.9 billion, or 0.9 percent, to a record $336.3 billion at year-end 1999. The percentage gain in surplus was the smallest since 1984, when surplus declined by 3.1 percent.
Copies of "Insurer Financial Results: 1999" Insurance Issues Series study can be ordered by calling ISO Customer Service toll-free at 1-800-888-4476.