NEW YORK, Dec. 12, 2000 — The U.S. property/casualty industry's net income after taxes through the first nine months of this year dropped 5 percent to $16.5 billion from $17.4 billion in the period a year ago.
The industry's surplus fell to $327.3 billion as of September 30, down 2.1 percent from $334.3 billion at year-end 1999, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).
The $0.9 billion decline in nine-month net income after taxes reflects deterioration in underwriting results despite faster premium growth and lower catastrophe losses. The industry's net loss on underwriting for the first nine months of the year grew to $21.9 billion, up $6.7 billion, or 43.9 percent, from $15.2 billion for the first nine months of 1999. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 108.9 percent for nine-months 2000, 2.6 percentage points worse than the 106.3 percent for nine-months 1999.
"The 108.9 percent combined ratio for the first three quarters of this year is the worst nine-month underwriting result since the 110 percent in 1994, when the Northridge earthquake caused $12.5 billion in losses," observed John J. Kollar, ISO's vice president for consulting and research. "But catastrophe losses did not drive the deterioration in this year's underwriting results. On the contrary, according to ISO's Property Claim Services unit, catastrophe losses through nine months fell from $8.1 billion in 1999 to $3.5 billion, making nine-month catastrophe losses this year the lowest in three years."
"Indeed, if catastrophe losses had remained at the levels experienced in 1999 instead of declining, the industry's combined ratio would have risen to 110.9 percent —two full percentage points worse than the 108.9 percent based on actual results," added Kollar.
"The deterioration in underwriting results through nine months reflects the imbalance between growth in premiums and increases in non-catastrophe loss and loss-adjustment expenses," commented Diana Lee, the NAII's vice president for research services. "Underwriting results will continue to deteriorate as long as the growth in premiums continues to fall short of the growth in losses."
"Industry net written premiums through nine-months 2000 rose 4.6 percent from a year earlier, and industry earned premiums rose 3.8 percent. But industry loss and loss-adjustment expenses for nine months increased 7.3 percent from a year earlier, with non-catastrophe losses climbing 10.6 percent," added Lee.
"Still, there are some positive signs," said Kollar. "The 4.6-percent increase in written premiums during the first nine months of this year compares with a 1.8-percent increase in the first nine months of 1999. This year's nine-month increase in premiums is the largest since 1993. And, on a quarterly basis, we have seen modest but progressive acceleration in premium growth compared with year-ago levels — from 2.1 percent in fourth-quarter 1999 to 5.5 percent in third-quarter 2000. These data indicate a gradual firming in prices," added Kollar.
The figures are consolidated estimates for the entire industry based on the reports of insurers that account for at least 96 percent of the U.S. property/casualty insurance business.
The effect of increased underwriting losses on the industry's net income was partially offset by growth in investment income (primarily dividends earned from stocks and interest on bonds), higher realized capital gains, improved results for miscellaneous other operations, and lower taxes. Net investment income rose 2.2 percent to $29.2 billion for the first nine months of this year from $28.6 billion in the comparable period last year. Realized capital gains rose 29.9 percent to $13.5 billion through nine-months 2000 from $10.4 billion in the corresponding period last year. Income from miscellaneous operations totaled $0.6 billion for the first nine months of this year, compared with a loss of $1 billion a year ago, and the industry's federal income taxes fell to $4.9 billion from $5.3 billion.
The industry's consolidated surplus — its assets minus its liabilities — declined $7.1 billion from year-end 1999 to September 30, 2000, despite $16.5 billion in net income after taxes and $1.2 billion in new funds paid into the industry during the first three quarters of the year. Factors contributing to the decline in surplus include $13.5 billion in unrealized capital losses, $8.5 billion in dividends to shareholders, and $2.8 billion in miscellaneous charges against surplus.
The underwriting loss through nine-months 2000 amounts to 10 percent of the $219 billion in premiums earned during the period, up from 7.2 percent of the $210.9 billion in premiums earned through nine-months 1999.
The industry's net written premiums through nine-months 2000 totaled $228 billion, up from $218 billion in the corresponding period a year ago. Overall loss and loss-adjustment expenses rose to $176.1 billion during the first three quarters of 2000, up $11.9 billion from $164.2 billion in the first three quarters of 1999. Non-catastrophe loss and loss-adjustment expenses climbed $16.5 billion to $172.6 billion from $156.1 billion through nine-months 1999. Other underwriting expenses totaled $62.4 billion through nine-months 2000, up $2.3 billion, or 3.8 percent, from $60.1 billion through nine-months 1999. Dividends to policyholders rose to $2.4 billion for the first three quarters of this year from $1.8 billion for the corresponding period in 1999.
The industry's pre-tax net investment gain (the sum of net investment income and realized capital gains) for nine-months 2000 was $42.7 billion, up 9.6 percent from $38.9 billion a year ago.
The industry's pre-tax operating income (the sum of the gain or loss on underwriting, net investment income, and other miscellaneous income) declined 35.7 percent to $7.9 billion for nine-months 2000 from $12.3 billion in the period a year ago.
Insurers' unrealized capital losses of $13.5 billion through nine-months 2000 compare favorably with $15.7 billion in unrealized capital losses through nine-months 1999. The $8.5 billion in dividends to shareholders during the first three quarters of this year compare with $11 billion during the corresponding period a year ago. The $2.8 billion in miscellaneous charges against surplus is an improvement from $4.8 billion in such charges through nine-months 1999.
Combining realized capital gains and unrealized capital losses, insurers suffered total capital losses of $0.1 billion through nine-months 2000, compared with total capital losses of $5.3 billion a year ago.
Industry loss and loss-adjustment expense reserves — the funds set aside to settle and pay claims — decreased 1.1 percent to $359.2 billion as of September 30, 2000, from $363.2 billion as of September 30, 1999.
"The drop in loss reserves could reflect efforts by insurers to settle and pay claims faster," said Lee. "Settling claims quickly cuts costs and benefits the bottom line. And paid loss and loss-adjustment expenses through the first nine months of 2000 were up 7.7 percent from the corresponding period last year," added Lee.
"Alternative explanations for the drop in loss and loss-adjustment expense reserves include possible deterioration in loss-reserve adequacy," observed Kollar. "ISO's recently concluded analysis of industry loss and loss-adjustment expense reserves indicates that loss-reserve adequacy deteriorated each year from 1994 to 1999, with the result that reserves as of year-end 1999 were deficient by amounts estimated at $18 billion to $37 billion compared to indicated reserves, before discounts based on the time value of money."
Lee and Kollar agreed that it is too soon to tell whether the drop in reserves reflects faster payment of claims, continued deterioration in reserve adequacy, or a combination of the two.
For the third quarter of 2000, the industry's consolidated net income after taxes was $6.5 billion, compared with net income of $2.5 billion in third-quarter 1999 and net income of $4.1 billion in second-quarter 2000.
Net income for third-quarter 2000 consists primarily of $2.4 billion in pre-tax operating income and $6 billion in realized capital gains. The industry incurred $1.9 billion in federal income taxes in the third quarter of 2000, almost double the $1 billion incurred in third-quarter 1999.
The $2.4 billion in pretax operating income during third-quarter 2000 compares with $0.9 billion in the corresponding period a year ago. Third-quarter 2000 operating income consisted of $7.1 billion in pre-tax losses on underwriting, $9.8 billion in pre-tax net investment income, and $0.2 billion in losses on miscellaneous other operations.
The third-quarter pre-tax underwriting loss of $7.1 billion was 3.7 percent less than the $7.4 billion underwriting loss in the third quarter of 1999. The improvement in underwriting results reflects a sharp decline in catastrophe losses. According to ISO's Property Claims Services (PCS) unit, third-quarter 2000 catastrophe losses totaled just $315 million, down from $2.7 billion in third-quarter 1999 to the lowest third-quarter amount in more than a decade.
Written premiums totaled $78.7 billion in third-quarter 2000, up 5.5 percent from $74.6 billion in third-quarter 1999. That compares with third-quarter written premium growth of 3.4 percent for 1999 over 1998 and 1.5 percent for 1998 over 1997.
The third-quarter 2000 underwriting loss represents 9.5 percent of $75.2 billion in earned premiums, down from 10.3 percent of $71.8 billion in earned premiums for the third quarter last year. The underwriting loss in the third quarter of 2000 includes $0.5 billion of premiums returned to policyholders as dividends, down from $0.6 billion in third-quarter 1999.
The $9.8 billion of net investment income for the third quarter of 2000 was up 3.7 percent from $9.4 billion in the comparable period last year. Realized capital gains for third-quarter 2000 were $6 billion, compared with $2.6 billion in third-quarter 1999. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $15.8 billion in 2000's third quarter, compared with $12 billion in the third quarter of 1999.
FOR 2000 and 1999
|NET WRITTEN PREMIUM||228,036||217,957|
|NET EARNED PREMIUM||219,049||210,940|
|INCURRED LOSS & LOSS ADJUSTMENT EXPENSE||176,108||164,186|
|STATUTORY UNDERWRITING GAIN (LOSS)||(19,447)||(13,374)|
|NET UNDERWRITING GAIN (LOSS)||(21,863)||(15,198)|
|PRE-TAX OPERATING INCOME||7,908||12,305|
|NET INVESTMENT INCOME EARNED||29,189||28,552|
|NET REALIZED CAPITAL GAIN (LOSS)||13,479||10,380|
|NET INVESTMENT GAIN||42,668||38,931|
|NET INCOME AFTER TAXES||16,502||17,368|
|LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES||359,154||363,246|
|COMBINED RATIO, POST-DIVIDENDS (%)||108.9||106.3|
|NET WRITTEN PREMIUM||78,735||74,622|
|NET EARNED PREMIUM||75,186||71,809|
|INCURRED LOSS & LOSS ADJUSTMENT EXPENSE||60,954||58,121|
|STATUTORY UNDERWRITING GAIN (LOSS)||(6,654)||(6,766)|
|NET UNDERWRITING GAIN (LOSS)||(7,133)||(7,410)|
|PRE-TAX OPERATING INCOME||2,426||865|
|NET INVESTMENT INCOME EARNED||9,784||9,438|
|NET REALIZED CAPITAL GAIN (LOSS)||5,969||2,601|
|NET INVESTMENT GAIN||15,753||12,039|
|NET INCOME AFTER TAXES||6,472||2,504|
|LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES||359,154||363,246|
|COMBINED RATIO, POST-DIVIDENDS (%)||108.2||109.2|
Michael R. Murray (ISO)
Sue McKenna (NAII)
Loretta Worters (III)