Property/Casualty Industry's First-Half Income and Surplus Rose on Strong Underwriting Results and Investment Gains

JERSEY CITY, N.J., Oct. 18, 2004 — The U.S. property/casualty insurance industry's net income after taxes rose to a record $23.5 billion in first-half 2004 from $14.5 billion in first-half 2003, as both underwriting and investment results improved. Reflecting the industry's income and unrealized capital gains on investments, its surplus, or statutory net worth, increased 6.8 percent to $370.4 billion at June 30 from $347 billion at year-end 2003, according to ISO and the Property Casualty Insurers Association of America (PCI).

The industry's income in first-half 2004 surpassed its income during any other six-month period, both before and after adjusting for inflation, since the start of ISO's quarterly records in 1986. The industry's surplus as of June 30, 2004, would also have been a record if not for inflation. Adjusted for inflation, the industry's surplus remained 4.7 percent below its peak at June 30, 1998.

"Strong underwriting results drove the increases in net income and surplus, with insurers earning $9 billion in net gains on underwriting in first-half 2004. Prior to 2004, insurers suffered net losses on underwriting during the first half of every year since at least 1986, when our quarterly records begin," observed John J. Kollar, ISO vice president for consulting and research. "The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved 5.4 percentage points to 94.4 percent in first-half 2004 from 99.8 percent in first-half 2003. At 94.4 percent, the combined ratio for first-half 2004 was the best first-half combined ratio in at least 19 years and almost two percentage points better than the best full-year combined ratio since 1959, when our annual records begin."

"Increases in investment income and realized capital gains also contributed to the growth in insurers' net income and surplus," said Roger Kenney, PCI assistant vice president for research. "Net investment income — primarily dividends from stocks and interest on bonds — grew 4.1 percent to $19 billion in six-months 2004 from $18.3 billion in six-months 2003. And insurers realized $5 billion in capital gains on investments in first-half 2004, up from $4.5 billion in first-half 2003. Surplus also benefited from $4.1 billion in unrealized capital gains not included in income."

The figures are consolidated estimates for all private property/casualty insurers based on reports accounting for 96 percent of all business written by private U.S. property/casualty insurers.

"Reflecting the increase in net income, insurers' profitability improved significantly, with the industry's annualized rate of return on average surplus rising to 13.1 percent in first-half 2004 from 9.7 percent for first-half 2003," observed Kenney. "The industry's annualized rate of return through six months has bounced back from a cyclical low of 1.8 percent in first-half 2001 to its highest level since the 13.8 percent for first-half 1997."

"But insurance is a cyclical business, and improved profitability seems to have sparked increased competition in insurance markets that threatens to undermine underwriting results going forward," said Kollar. "ISO MarketWatchTM data show that actual rate changes on renewals for commercial insurance polices turned positive in mid-1999 and gained momentum through July 2002, when they peaked at 12.9 percent. But since then, rate changes on renewals dwindled to just 3.7 percent in March 2004 — less than a third of what they were at their peak. And the Council of Insurance Agents and Brokers' second-quarter 2004 rate survey indicates commercial insurance prices fell an average of 3.2 percent for all sizes of accounts. Other indicators pointing to softening in insurance markets include the spread between written premium growth and GDP growth. That spread has turned negative, with premium growth in the first half of 2004 falling 2.4 percentage points short of the 6.9 percent increase in GDP versus year-ago levels. In the first half of 2003, premium growth exceeded GDP growth by 6.9 percentage points."

"Catastrophe losses are another wild card that threatens to undermine underwriting results going forward," added Kenney. "ISO's Property Claim Services unit has already reported that Hurricanes Charley, Frances and Ivan caused $17.2 billion in direct losses during the third quarter, and AIR Worldwide's catastrophe models indicate that Hurricane Jeanne could add another $5 billion to $9 billion to third-quarter catastrophe losses. These are big numbers compared to the industry's net income through six months, and the threat of severe catastrophes remains ever present."

Pre-tax operating income — the sum of gains or losses on underwriting, net investment income and other miscellaneous income — climbed $12.5 billion, or 79.8 percent, to $28.1 billion in first-half 2004 from $15.6 billion in first-half 2003. Improvement in underwriting results accounts for much of the increase in operating income, with the $9 billion in net gains on underwriting in first-half 2004 constituting an $11.7 billion positive swing from the industry's $2.7 billion in net losses on underwriting in first-half 2003. Net investment income increased $0.7 billion to $19 billion in first-half 2004 from $18.3 billion in first-half 2003. Other miscellaneous income remained roughly flat, receding to $66 million in first-half 2004 from $74 million in first-half 2003.

Net investment gains — the sum of net investment income and realized capital gains (losses) — rose $1.2 billion, or 5.2 percent, to $24 billion in first-half 2004 from $22.8 billion in first-half 2003.

Partially offsetting the $12.5 billion increase in pre-tax operating income and the $0.4 billion increase in realized capital gains, the industry's federal income taxes rose $3.9 billion to $9.6 billion in first-half 2004 from $5.7 billion in first-half 2003. Reflecting the changes in pre-tax operating income, realized capital gains and federal income taxes, insurers' net income after taxes rose $9 billion, or 62.2 percent, to $23.5 billion in first-half 2004 from $14.5 billion in first-half 2003.

The net gains on underwriting in first-half 2004 amount to 4.5 percent of the $202.6 billion in premiums earned during the period. The net gains on underwriting in the first half of this year contrast with net losses on underwriting during the first half of 2003 amounting to 1.4 percent of the $190 billion in premiums earned during the period.

Underwriting results improved even though premium growth slowed. Though net written premiums climbed $9.3 billion to $212.1 billion in first-half 2004 from $202.8 billion in first-half 2003, written premium growth slowed to 4.6 percent in first-half 2004 from 11 percent in first-half 2003. Net earned premiums rose $12.6 billion to $202.6 in first-half 2004 from $190 billion in first-half 2003, but earned premium growth slowed to 6.6 percent in first-half 2004 from 12.3 percent in first-half 2003.

"Reflecting developments in insurance markets, premium growth climbed fairly steadily from 1 percent in the first half of 1999 to a peak of 12.2 percent in the first half of 2002 but has been slowing ever since. At 4.6 percent, first-half written premium growth had dropped to its slowest pace since the 4.3 percent increase in the first half of 2000," said Kollar. "Similarly, at 6.6 percent, first-half earned premium growth had dropped to its slowest pace since the 3.2 percent increase in the first half of 2000."

Contributing to the improvement in underwriting results, overall loss and loss adjustment expenses declined $2.1 billion, or 1.5 percent, to $140.1 billion in first-half 2004 from $142.1 billion in first-half 2003, as catastrophe losses fell $3.2 billion, or 48.4 percent, to $3.4 billion in first-half 2004 from $6.5 billion in first-half 2003, according to ISO's Property Claim Services (PCS) unit. The $3.4 billion in catastrophe losses during first-half 2004 compare with an average of $5.7 billion in first-half catastrophe losses during the 10 years from 1994 to 2003. Non-catastrophe loss and loss adjustment expenses rose $1.1 billion, or 0.8 percent, to $136.7 billion in first-half 2004 from $135.6 billion a year earlier.

Other underwriting expenses — primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — rose $3 billion, or 6 percent, to $53 billion in the first half of this year from $50 billion in the first half of last year.

Dividends to policyholders declined $0.1 billion to $0.5 billion in first-half 2004 from $0.6 billion in first-half 2003.

The $23.4 billion increase in the industry's consolidated surplus in first-half 2004 compares with a $27.1 billon increase in first-half 2003. The increase in surplus in first-half 2004 consisted of $23.5 billion in net income after taxes, $4.1 billion in unrealized capital gains on investments and $2 billion in new funds paid in less $5 billion in dividends to stockholders and $1.2 billion in miscellaneous charges against surplus.

The $4.1 billion in unrealized capital gains in first-half 2004 is down 65.4 percent from the $11.9 billion in unrealized capital gains in first half-2003.

The $2 billion in new funds paid in during first-half 2004 is down 39.8 percent from the $3.3 billion in new funds paid in during first-half 2003.

The $5 billion in dividends to stockholders in six-months 2004 is up 26.2 percent from the $4 billion in dividends to stockholders in six-months 2003.

The $1.2 billion in miscellaneous charges against surplus through six-months 2004 constitute a $2.5 billion adverse swing from the $1.3 billion in miscellaneous additions to surplus through six-months 2003.

Combining realized and unrealized capital gains, insurers enjoyed $9.1 billion in overall capital gains on investments in first-half 2004 — down $7.4 billion, or 44.7 percent, from the $16.5 billion in overall capital gains in first-half 2003.

"The decline in insurers' total capital gains on investments is a reflection of developments in financial markets," commented Kollar. "In the first half of 2004, the S&P 500 rose 2.6 percent — only about a quarter of the 10.8 percent increase in the S&P 500 during the first half of 2003. With the S&P 500 having fallen 2.3 percent in the third quarter of this year and some other stock market indicators having dropped even more during the period, we have to expect that insurers' capital gains through nine months will be further below their levels a year ago. Beyond that, any projection for capital gains is only as good as the underlying forecast for stock prices."

"Developments in financial markets also cloud the outlook for investment income going forward," said Kenney. "The 4.1 percent increase in investment income in first-half 2004 is the net result of a 12.5 percent increase in insurers' average holdings of cash and invested assets and a 7.5 percent decline in the yield on those assets. Though the Federal Reserve Board raised its target interest rate for the third time in as many months on September 21, the average yield on 10-year Treasury notes fell to 4.13 percent in September from 4.73 percent in June. If investment yields don't recover and escalating competition in insurance markets cuts into the underwriting cash flows that fund new investments, we could see some weakness in investment income going forward."

Second-Quarter Results
The industry's consolidated net income after taxes for second-quarter 2004 amounted to $10.2 billion, up 28.1 percent from the $8 billion in net income for second-quarter 2003. The industry's net income for second-quarter 2004 reflects the excess of $13.2 billion in pre-tax operating income and $1.6 billion in realized capital gains on investments over $4.7 billion in federal income taxes.

The industry's second-quarter pre-tax operating income of $13.2 billion is up from $7.8 billion in second-quarter 2003. Second-quarter 2004 operating income consisted of $3.7 billion in net gains on underwriting, $9.6 billion in net investment income and $29 million in miscellaneous charges against income.

The $3.7 billion in net gains on underwriting contrast with the $1.2 billion in net losses on underwriting in the second quarter of 2003. Underwriting results benefited from sharply lower catastrophe losses, which fell 53.9 percent to $2.3 billion in second-quarter 2004 from $5.1 billion in second-quarter 2003, according to ISO's PCS unit. The $2.3 billion in catastrophe losses during second-quarter 2004 compare with an average of $3 billion in second-quarter catastrophe losses during the 10 years from 1994 to 2003.

The second-quarter 2004 net gains on underwriting amount to 3.6 percent of the $102.3 billion in premiums earned during the period. This contrasts with second-quarter 2003 net losses on underwriting amounting to 1.2 percent of the $96.4 billion in premiums earned during that period.

The industry's combined ratio improved to 95.5 percent in second-quarter 2004 from 99.9 percent in second-quarter 2003. At 95.5 percent, the industry's second-quarter combined ratio had improved to its best level since at least 1986, when ISO's quarterly records begin.

The $3.7 billion in net gains on underwriting is after deductions for $0.2 billion in premiums returned to policyholders as dividends, with dividends to policyholders falling from $0.3 billion in second-quarter 2003.

Written premiums rose to $106.1 billion in second-quarter 2004 from $101.4 billion in second-quarter 2003, but second-quarter written premium growth dropped to 4.7 percent in 2004 from 9.3 percent in 2003 and 14.4 percent in 2002. At 4.7 percent, second-quarter premium growth had dropped to its slowest pace since the 1.1 percent increase in second-quarter 1999.

The $9.6 billion of net investment income is up 6.1 percent from $9 billion in the same period last year.

The $29 million in miscellaneous charges against income is down from $83 million in miscellaneous charges against income in second-quarter 2003.

The $1.6 billion in realized capital gains is less than half the $3.4 billion in realized capital gains during the second quarter of 2003.

Combining net investment income and realized capital gains, the industry posted $11.2 billion in net investment gains in second-quarter 2004, down 9.7 percent from $12.4 billion a year earlier.

OPERATING RESULTS FOR 2004 and 2003 ($ Millions)
     
FIRST HALF 2004 2003
NET WRITTEN PREMIUM 212,117 202,828
NET EARNED PREMIUM 202,592 190,019
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE 140,057 142,129
STATUTORY UNDERWRITING GAIN (LOSS) 9,563 (2,070)
POLICYHOLDERS' DIVIDENDS 534 640
NET UNDERWRITING GAIN (LOSS) 9,029 (2,709)
PRE-TAX OPERATING INCOME 28,110 15,633
NET INVESTMENT INCOME EARNED 19,015 18,268
NET REALIZED CAPITAL GAIN (LOSS) 4,984 4,544
NET INVESTMENT GAIN 23,999 22,813
NET INCOME (LOSS) AFTER TAXES 23,520 14,496
SURPLUS (CONSOLIDATED) 370,433 312,455
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES 436,178 407,335
COMBINED RATIO, POST-DIVIDENDS (%) 94.4 99.8
     
SECOND QUARTER 2004 2003
NET WRITTEN PREMIUM 106,135 101,382
NET EARNED PREMIUM 102,280 96,381
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE 71,672 72,062
STATUTORY UNDERWRITING GAIN (LOSS) 3,916 (878)
POLICYHOLDERS' DIVIDENDS 244 304
NET UNDERWRITING GAIN (LOSS) 3,672 (1,182)
PRE-TAX OPERATING INCOME 13,244 7,784
NET INVESTMENT INCOME EARNED 9,602 9,048
NET REALIZED CAPITAL GAIN (LOSS) 1,621 3,379
NET INVESTMENT GAIN 11,222 12,427
NET INCOME (LOSS) AFTER TAXES 10,209 7,969
SURPLUS (CONSOLIDATED) 370,433 312,455
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES 436,178 407,335
COMBINED RATIO, POST-DIVIDENDS (%) 95.5 99.9

Release: Immediate

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

Sue McKenna (PCI)
(847) 553-3615

Loretta Worters (III)
(212) 346-5500