New ISO Study Shows Property/Casualty Insurers' Net Income and Surplus Fell in 2000 Despite Faster Premium Growth

JERSEY CITY, N.J., July 5, 2001 — Despite accelerated premium growth, U.S. property/casualty insurers' net income after taxes dropped last year as underwriting losses mounted, according to Insurance Services Office, Inc.'s (ISO) "Insurer Financial Results: 2000" Insurance Issues Series study. Industry surplus fell for the first time since 1984.

The ISO study reported that the industry's after-tax income fell to $20.3 billion last year, down 7.3 percent from $21.9 billion in 1999. The industry's surplus declined $15.7 billion, or 4.7 percent, to $318.7 billion at year-end 2000 from $334.3 billion at year-end 1999 — the largest percentage decline since 1974, when surplus dropped by 23.9 percent.

The industry's GAAP (Generally Accepted Accounting Principles) rate of return on average net worth dropped to 5.8 percent last year from 6 percent the year before.

Property/casualty insurers' net underwriting loss after dividends to policyholders ballooned to $32.3 billion in 2000, up 39.8 percent from $23.1 billion in 1999, even as net investment income and realized capital gains rose.

"According to ISO MarketWatchTM data, which tracks rate changes on renewals for a broad spectrum of commercial lines, broad-based firming in commercial insurance pricing contributed to last year's premium growth," said John J. Kollar, ISO's vice president for consulting and research. "Though the timing and magnitude of changes in rates varied by line of insurance, class of business and location, rates on renewals for commercial lines generally declined in 1996, 1997 and 1998, but then turned positive in mid-1999 and rose an average of 5.2 percent last year," Kollar added.

Kollar observed that market-segment data from ISO Market ProfilerTM also indicate variation in experience by line of insurance, standard industrial classification (SIC) code and location.

"For example, from 1996 to 2000, commercial lines premiums for apparel manufacturing and energy production decreased between 2.8 percent and 4.7 percent per year, while premiums for securities and commodities brokers rose 7.8 percent per year. The differences in experience by line, location and standard industrial classification code suggest that proper positioning in the market can be key to individual insurers' success," he commented.

The industry's combined ratio — a key measure of losses and expenses per dollar of premium collected by insurers — worsened to 110.4 percent, up 2.7 percentage points from 107.8 percent in 1999.

Though catastrophe losses in 2000 fell to $4.6 billion from $8.3 billion a year earlier, higher non-catastrophe loss and loss-adjustment expenses drove down underwriting profitability. Non-catastrophe loss and loss-adjustment expenses in 2000 jumped 10.5 percent to $236.4 billion from the period a year ago.

Reflecting that increase, overall loss and loss-adjustment expenses, including catastrophes, rose $18.7 billion, or 8.4 percent, to $241 billion last year. According to the ISO study, the reported loss and loss-adjustment expenses may have been understated because of continuing deterioration in the adequacy of the industry's reserves for losses other than environmental and asbestos.

"When ISO adjusts reported data for catastrophes, environmental and asbestos losses, and changes in reserve adequacy, the industry's recent financial results appear noticeably worse," Kollar observed. "Last year, the industry's adjusted combined ratio rose 5.2 percentage points to 114.2 percent from the year-earlier level. The industry's adjusted GAAP return on net worth also has been trending downward since 1992 — the first year for which this data is available — slipping from an adjusted 16.6 percent in 1992 to an adjusted 3.4 percent in 2000," he added.

Partially offsetting the effects of deterioration in underwriting results, the industry's net investment income rose in 2000 to $40.6 billion, or 4.4 percent, after having declined 2.7 percent in 1999. The increase in investment income is attributable to a higher yield on average cash holdings and invested assets (5.1 percent last year, up from 4.9 percent in 1999). But average cash holdings and invested assets declined to $797.4 billion from $797.9 billion.

The industry's realized capital gains climbed to $17 billion, up 30.3 percent from $13 billion in the preceding year. Combining the $17 billion realized capital gains with the $17.5 billion in unrealized capital losses, the industry suffered $0.5 billion in overall capital losses in 2000. Still, the industry posted $132.7 billion in capital gains during the 1995-2000 period, a reflection of the strength of the financial markets during these six years.

Although long-term data show insurers historically have been less profitable than the Fortune 500 companies, the profitability gap last year between the two was much larger than normal. "The Fortune 500 companies' return on net worth in 2000 was 15.7 percent, or nearly triple the 5.8 percent earned by the property/casualty industry overall," observed Kollar. "From 1983 to 2000, the median return on net worth for Fortune 500 companies averaged an estimated 13.9 percent — 5 percentage points higher than the 8.9 percent average of the entire property/casualty industry," he added.

Despite declining profits and profitability, property/casualty stocks outperformed the market as measured by the Standard & Poor's (S&P) 500 last year. From year-end 1999 to year-end 2000, investors in the S&P property/casualty index earned a total rate of return (capital gains plus dividends) of 55.6 percent, while investors in the S&P 500 had a negative overall rate of return of 9.1 percent.

Data from Goldman Sachs (GS) indicate reinsurance shares did the best last year, appreciating 83.2 percent. The GS commercial property/casualty index climbed 42.2 percent from year-end 1999 to year-end 2000, while the GS personal property/casualty index rose 24.2 percent.

Merger-and-acquisition activity in the property/casualty industry declined for the second year in a row, with the number of transactions dropping to 52 in 2000 from a record 117 in 1998. The reported dollar value of transactions has also fallen for two years, dropping to $8.9 billion last year from a record $55.8 billion in 1998. Factors that probably contributed to the slowdown in 2000 included weakness in financial markets, concern about the outlook for the economy and the industry, increases in insurance stock prices that raised the cost of acquisitions, and questions about the success of past transactions, according to the ISO study.

Copies of the "Insurer Financial Results: 2000" Insurance Issues Series study can be ordered by calling ISO Customer Service toll-free: 1-800-888-4476; e-mail:

Release: Immediate

Giuseppe Barone / Erica Helton
MWW Group (for ISO)
201-507-9500 /

Archived Press