Property/Casualty Industry's Net Income Surges in First-Half, But Surplus Falls on Weak Investment Results

January 1, 2011 / 10 min read

JERSEY CITY, NJ, Sept. 25, 2002 — The U.S. property/casualty industry's net income after taxes rose 66.4 percent to $4.6 billion in first-half 2002 from $2.8 billion in first-half 2001, primarily because of improved underwriting results. But the industry's surplus, or net worth, fell 2.3 percent to $282.9 billion at June 30 from $289.6 billion at year-end 2001, because of capital losses on investments, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

The industry's net loss on underwriting decreased 38.8 percent in first-half 2002 to $11.9 billion from $19.4 billion in first-half 2001, with acceleration in premium growth and lower catastrophe losses contributing to the improvement in underwriting results. Surplus declined in first-half 2002 largely because of $8.6 billion in unrealized capital losses on investments as a result of declines in stock markets. Those unrealized losses more than offset additions to surplus including the industry's $4.6 billion in net income.

Net written premiums climbed $19.6 billion to $182.4 billion in first-half 2002, as premium growth accelerated versus year-ago levels to 12 percent from 9.9 percent in first-half 2001 and 4.3 percent in first-half 2000. The 12 percent increase in written premiums in the first half of 2002 is the largest first-half increase in premiums since 1987, when premiums rose 13 percent versus year-ago levels.

"The substantial improvement in underwriting results and the growth in net income after taxes in the first half of this year reflect changes in the operating environment," observed John J. Kollar, ISO vice president for consulting and research. "All else being equal, one would expect premiums to grow in proportion to the economy. But with just one exception, premium growth fell short of economic growth every year from 1988 to 2000 as a result of softening in insurance markets. Since then, insurance markets have been firming, and the spread between premium growth and GDP growth widened from 6.8 percentage points in first-half 2001 to 9 percentage points in first-half 2002," Kollar added.

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 insurance business.

Catastrophe losses fell to $3 billion in first-half 2002 from $6.9 billion in first-half 2001, according to ISO's Property Claim Services (PCS) unit. At $3 billion, catastrophe losses through six months had fallen to their lowest level since first-half 1997, when there were just $1.8 billion in catastrophe losses.

Overall loss and loss-adjustment expenses increased 3.9 percent to $134.3 billion in first-half 2002 from $129.3 billion in first-half 2001, as non-catastrophe loss and loss-adjustment expenses rose 7.3 percent to $131.3 billion in first-half 2002 from $122.4 billion a year earlier.

Other underwriting expenses — primarily acquisition expenses, other expenses associated with the underwriting process, pricing and servicing insurance policies, and premium taxes — rose 7 percent to $45.9 billion in the first half of this year from $42.9 billion in the first half of last year.

Dividends to policyholders decreased 16.2 percent to $618 million in first-half 2002 from $738 million in first-half 2001.

The underwriting loss in first-half 2002 amounts to 7 percent of the $169 billion in premiums earned during the period, down from 12.7 percent of the $153.5 billion in premiums earned during the comparable period last year. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 105 percent in the first half of this year, 6 percentage points better than the 111.1 percent a year ago.

"The decline in catastrophe losses accounts for 1.7 percentage points of the 6 percentage point improvement in the industry's combined ratio for first-half 2002," noted Don Griffin, NAII assistant vice president for business and personal lines. "The bulk of the improvement in the industry's combined ratio — 4.3 percentage points — reflects the excess of growth in premiums over growth in non-catastrophe losses and other expenses."

Reflecting the improvement in underwriting results, the industry's net income after taxes rose despite a decline in insurers' investment income and realized capital losses on investments. Net investment income — primarily dividends earned from stocks and interest on bonds — declined 4.9 percent to $17.8 billion in first-half 2002 from $18.7 billion in first-half 2001. Insurers realized $564 million in capital losses on investments in first-half 2002, in contrast to the $5.3 billion in gains on investments realized in the first half of last year. Combining net investment income and realized capital losses in first-half 2002, the industry's net investment gain amounted to $17.3 billion, down 28.3 percent from $24.1 billion in first-half 2001.

"The 4.9 percent decrease in investment income in first-half 2002 versus year-ago levels reflects a decline in the yield on investments," noted Kollar. "Insurers' average holdings of cash and invested assets during the first half of 2002 were 1.2 percent above their average holdings of cash and invested assets in the first half of 2001, but the annualized yield on cash and invested assets fell 6 percent. With the average yield on ten year Treasury notes having fallen from 4.93 percent in June to 4.26 percent in August, and with the pressure on the Federal Reserve Board to keep interest rates low to bolster a sagging economy and weak stock markets, low yields are apt to impede the growth of investment income going forward," Kollar added.

The industry earned $28 million in income from other miscellaneous operations in the first half of this year, in contrast to losing $763 million on such operations in first-half 2001. Pre-tax operating income — the sum of gains or losses on underwriting, net investment income, and other miscellaneous income — rose to positive $6 billion in first-half 2002 from negative $1.5 billion in first-half 2001.

Also contributing to the increase in net income after taxes, the industry's federal income taxes fell 29.8 percent to $752 million for the first-half 2002 from $1.1 billion a year ago.

The $6.7 billion decline in the industry's consolidated surplus — its assets minus its liabilities — in first-half 2002 compares with a $19.2 billion decline in first-half 2001. The $6.7 billion decline in surplus reflects the excess of $8.6 billion in unrealized capital losses on investments, $3.3 billion in dividends to shareholders, and $1 billion in miscellaneous charges against surplus over $4.6 billion in net income after taxes and $1.5 billion in new funds paid in.

The $8.6 billion in unrealized capital losses on investment in first-half 2002 is down $10.2 billion from $18.8 billion in unrealized capital losses in first-half 2001.

The $3.3 billion in dividends to shareholders is down $3.3 billion from $6.6 billion in the first half of last year.

The $1 billion in miscellaneous charges against surplus contrasts with $2.3 billion in miscellaneous additions to surplus in the first half of 2001.

The $4.6 billion in net income after taxes is up $1.9 billion from $2.8 billion during the first six months of 2001.

The $1.5 billion in new funds paid in compares with $1.1 billion in the first half of 2001.

Combining realized and unrealized capital losses, insurers suffered $9.2 billion in overall capital losses on investments in first-half 2002 — an improvement from $13.5 billion in overall capital losses in first-half 2001.

"While the increase in first-half net income is welcome news, the industry's recovery since last year's terrorist attack has been hampered by adverse developments in financial markets," commented Griffin. "The decline in surplus in first-half 2002 reflects capital losses on investments attributable to the tremendous weakness in stock markets during the period as exemplified by the 13.8 percent decline in the S&P 500 through the end of June. Given that the S&P 500 dropped a further 15.8 percent from the end of June through Monday, September 23, and the uncertain outlook for stock markets, capital losses on investments may continue to eat into insurers' surplus for some time to come," Griffin added.

Second-Quarter Results
The industry's consolidated net income after taxes for second-quarter 2002 was negative $647 million, $2.3 billion less than the industry's $2.9 billion net loss after taxes in second-quarter 2001, but a sharp swing from the industry's $5.3 billion in net income for first-quarter 2002.

The net loss after taxes for second-quarter 2002 consisted of $824 million in pre-tax operating income, $909 million in realized capital losses on investments, and $562 million in federal income taxes.

The industry's second-quarter pre-tax operating income of $824 million compares with a pre-tax operating loss of $5.7 billion in second-quarter 2001. Second-quarter 2002 operating income consisted of $8.3 billion in pre-tax underwriting losses, $8.8 billion in pre-tax net investment income and $259 million in income from other miscellaneous operations.

The $8.3 billion underwriting loss is down 38.6 percent from the $13.4 billion underwriting loss in the second quarter of 2001. Contributing to the decline in net losses on underwriting, catastrophe losses fell to $2.4 billion in the second quarter of 2002 from $6.2 billion in the comparable period last year, according to ISO's PCS unit.

The second-quarter 2002 underwriting loss represents 9.5 percent of $86.6 billion in premiums earned during the period, down from 17.5 percent of the $77 billion in premiums earned during the second quarter of last year. The $86.6 billion underwriting loss includes $262 million in premiums returned to policyholders as dividends, down from $331 million in second-quarter 2001.

Written premiums totaled $92.6 billion, up 14.2 percent from $81 billion for second-quarter 2001. The 14.2 percent written premium growth compares with second-quarter 2001 written premium growth of 8.5 percent over 2000, 5.5 percent for 2000 over 1999 and 1.1 percent for 1999 over 1998.

The $8.8 billion of net investment income is down 3.2 percent from $9.1 billion in the same period a year ago.

The $259 million in income from other miscellaneous operations contrasts with a $1.4 billion loss from such operations in second-quarter 2001.

The $909 million in realized capital losses is a sharp reversal from $2.3 billion in realized capital gains during the second quarter of 2001.

Combining net investment income and realized capital losses, the industry posted $7.9 billion in total investment gains in second-quarter 2002, down from $11.4 billion a year earlier.

OPERATING RESULTS FOR 2002 and 2001 ($ Millions)
FIRST HALF	2002	2001
NET WRITTEN PREMIUM	182,434	162,855
NET EARNED PREMIUM	168,982	153,521
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	134,336	129,301
STATUTORY UNDERWRITING GAIN (LOSS)	(11,285)	(18,710)
POLICYHOLDERS' DIVIDENDS	618	738
NET UNDERWRITING GAIN (LOSS)	(11,904)	(19,447)
PRE-TAX OPERATING INCOME	5,956	(1,462)
NET INVESTMENT INCOME EARNED	17,831	18,749
NET REALIZED CAPITAL GAIN (LOSS)	(564)	5,322
NET INVESTMENT GAIN	17,267	24,071
NET INCOME (LOSS) AFTER TAXES	4,639	2,789
SURPLUS (CONSOLIDATED)	282,871	298,185
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	376,558	355,566
COMBINED RATIO, POST-DIVIDENDS (%)	105.0	111.1

SECOND QUARTER	2002	2001
NET WRITTEN PREMIUM	92,560	81,032
NET EARNED PREMIUM	86,556	77,018
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	71,151	68,658
STATUTORY UNDERWRITING GAIN (LOSS)	(7,998)	(13,112)
POLICYHOLDERS' DIVIDENDS	262	331
NET UNDERWRITING GAIN (LOSS)	(8,260)	(13,444)
PRE-TAX OPERATING INCOME	824	(5,723)
NET INVESTMENT INCOME EARNED	8,824	9,112
NET REALIZED CAPITAL GAIN (LOSS)	(909)	2,258
NET INVESTMENT GAIN	7,915	11,371
NET INCOME (LOSS) AFTER TAXES	(647)	(2,925)
SURPLUS (CONSOLIDATED)	282,871	298,185
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	376,558	355,566
COMBINED RATIO, POST-DIVIDENDS (%)	107.8	116.1

Release: Immediate

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

Sue McKenna (NAII)
847-297-7800

Loretta Worters (III)
212-346-5500