Property/Casualty Industry's Net Income Tumbles as Underwriting and Investment Results Deteriorate

January 1, 2011 / 8 min read

NEW YORK, March 30, 2000 The property/casualty insurance industry's net income after taxes fell to $22.2 billion in 1999 down $8.6 billion, or 28 percent, from $30.8 billion in 1998.

Major contributors to the decline in net income included a $9.5-billion decrease in the industry's pre-tax operating income to $13.9 billion in 1999 from $23.4 billion in 1998 and a $4.3-billion fall in the industry's realized capital gains to $13.7 billion from $18 billion. Partially offsetting the declines in operating income and realized capital gains was a drop in federal income taxes to $5.4 billion in 1999 from $10.6 billion in 1998.

Reflecting weakness in net income after taxes, the U.S. property/casualty industry's surplus, or statutory net worth, rose $2.9 billion, or 0.9 percent, to $336.3 billion at year-end 1999 from $333.3 at year-end 1998. Other factors detracting from the growth in surplus last year included $1.8 billion in unrealized capital losses, $15.9 billion in dividends to shareholders, and $5.4 billion in miscellaneous charges against surplus. New funds, or capital, paid into the industry amounted to $3.8 billion in 1999, compared with $5.2 billion in 1998, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

"The deterioration in operating income in 1999 reflected increases in net losses on underwriting, decreases in investment income, and an unfavorable swing in other miscellaneous income," said John J. Kollar, ISO's vice president for consulting and research.

The industry's operating income is the sum of gains or losses on underwriting, net investment income (primarily dividends earned from stocks and interest on bonds), and other miscellaneous income. The industry's net loss on underwriting grew by $6.6 billion, or 39.5 percent, to $23.4 billion in 1999 from $16.8 billion in 1998. The industry's net investment income fell by 3.3 percent to $38.6 billion in 1999 from $39.9 billion in 1998. The industry's miscellaneous income from other operations in 1999 amounted to a $1.3-billion loss, compared with a $0.2-billion gain the year before.

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 business.

Weak premium growth and increased loss and loss-adjustment expenses contributed to the 39.5 percent increase in net losses on underwriting. Industry net written premium rose just 1.9 percent to $287 billion in 1999 from $281.6 billion in 1998. Industry loss and loss-adjustment expenses climbed 4.9 percent to $222.2 billion last year from $211.8 billion in 1998. Other underwriting expenses also grew faster than premiums last year, increasing 3.6 percent to $80.8 billion in 1999 from $77.9 billion in 1998.

"At 1.9 percent, premium growth in 1999 was virtually unchanged from the record-low 1.8 percent experienced in 1998," said Diana Lee, the NAII's vice president for research services. "Partly because of the extreme weakness in premium growth over the past two years, premium growth averaged just 3.2 percent per year in the 1990s, compared to 8.7 percent per year in the 1980s and 12.1 percent per year in the 1970s," added Lee.

"The weakness in the industry's top-line revenue growth stands in stark contrast to strength in the economy and reflects competition induced by excess capacity," said Kollar. "Some analysts use premium-to-surplus ratios to measure capacity utilization for the insurance industry. The industry's premium-to-surplus ratio was 0.85 in 1999, almost unchanged from a record-low 0.84 in 1998. The progressive slowing in premium growth over the past two decades reflects long-term declines in premium-to-surplus ratios. In the 1990s, the premium-to-surplus ratio averaged 1.18, down from an average of 1.78 in the 1980s and an average of 2.22 in the 1970s," added Kollar.

The combined ratio a measure of losses and underwriting expenses per dollar of premium deteriorated to 107.9 percent in 1999, 2.2 percentage points worse than the industry's 105.6 percent combined ratio for 1998 and 6.3 percentage points worse than the 101.6 percent combined ratio for 1997.

Net losses on underwriting in 1999 amounted to 8.3 percent of the $282.9 billion in premiums earned during the year, up from 6 percent of the $277.7 billion in premiums earned during 1998. The underwriting loss for 1999 included $3.3 billion of premiums returned to policyholders as dividends, down from $4.7 billion in 1998.

"Underwriting results would have been even worse were it not for a decline in catastrophe losses," observed Lee. "Absent the decline in catastrophe losses, the industry's combined ratio for 1999 would have been 108.5 percent 0.6percentage points worse than the actual combined ratio," she said. According to ISO's Property Claim Services (PCS) unit, catastrophe losses in 1999 totaled $8.3 billion, down 17.4 percent from $10.1 billion in 1998. Other loss and loss-adjustment expenses rose to $213.9 billion in 1999, up 6.1 percent from $201.7 billion during 1998.

"Even with the decline in catastrophe losses during 1999, they remained far worse than average," said Kollar. "Taking inflation into account, catastrophe losses were higher in just five of the 50 years from 1949 to 1998," added Kollar.

The negative effects of weak premium growth and rising losses were compounded by deterioration in investment results. The industry's pre-tax net investment gain (the sum of net investment income and realized capital gains) fell $5.6 billion to $52.3 billion in 1999 from $57.9 billion in 1998. The decline in the industry's pre-tax investment gain reflects weakening in both investment income and realized capital gains. In 1999, net investment income fell $1.3 billion and realized capital gains dropped $4.3 billion, compared to their levels one year earlier.

Combining realized capital gains and unrealized capital losses, the insurance industry posted $11.9 billion in total capital gains in 1999, compared to $28.3 billion in total capital gains in 1998.

"The industry's net investment income has now declined two years in a row. Since 1949, the industry's investment income has declined in just two other years 1992 and 1993," said Lee. "The recent declines in net investment income are a reflection of the downward trend in interest rates from 1994 to 1998. The average yield on 10-year U.S. Treasury notes fell to 5.3 percent in 1998 from 7.1 percent in 1994."

"But, on a month-to-month basis, there was an upward trend in interest rates during 1999. The average yield on 10-year Treasury notes rose from 4.7 percent in December 1998 to 6.3 percent in December 1999. And, the Fed has already raised interest rates twice this year. If upward trends in interest rates persist, we may soon see increases in the industry's investment income," added Lee.

"The decline in the industry's capital gains in 1999 reflects slowing increases in stock prices and the negative effects of rising interest rates in 1999 on the market value of the industry's bond portfolio," noted Kollar. "While the Standard & Poor's 500 index of common-stock prices rose a healthy 19.5 percent in 1999, it climbed 26.7 percent in 1998 and 31 percent in 1997. And, ISO estimates rising interest rates during 1999 cut the market value of the industry's bond portfolio by about $55 billion," commented Kollar.

Fourth-Quarter Results

The industry's fourth-quarter 1999 net income after taxes was $4.5 billion, compared with $7.5 billion in fourth-quarter 1998 and $2.5 billion in third-quarter 1999.

Net income for fourth-quarter 1999 consisted primarily of $2 billion in pre-tax operating income and $2.8 billion in realized capital gains. The industry incurred $0.3 billion in federal income taxes in the fourth quarter of 1999, compared with $2.3 billion incurred in fourth-quarter 1998.

The industry's fourth-quarter 1999 pre-tax operating income of $2 billion was down 48.8 percent from $3.9 billion in the comparable period a year earlier. Fourth-quarter 1999 operating income consisted of $8 billion in underwriting losses, $10.2 billion in net investment income, and $0.3 billion in miscellaneous losses on other operations.

The fourth-quarter pre-tax underwriting loss of $8 billion was 20.7 percent more than the $6.6 billion underwriting loss in the fourth quarter of 1998. Overall losses on underwriting increased despite a fall in catastrophe losses to $0.3 billion in the fourth quarter of 1999 from $0.5 billion in the fourth quarter of 1998, as reported by ISO's PCS unit.

The fourth-quarter 1999 underwriting loss represents 11.1 percent of $71.9 billion in earned premiums, up from 9.4 percent of $69.9 billion in earned premiums during the fourth quarter of the prior year. The underwriting loss in the fourth quarter of 1999 included $1.5 billion of premiums returned to policyholders as dividends, down from $1.8 billion in fourth-quarter 1998.

The $10.2 billion of net investment income for the fourth quarter of 1999 was down 3.3 percent from $10.6 billion in the period a year earlier. Realized capital gains for fourth-quarter 1999 were $2.8 billion, compared with $5.9 billion in fourth-quarter 1998. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $13 billion in 1999's fourth quarter, compared with $16.5 billion in 1998's fourth quarter.

Written premiums totaled $69 billion for fourth-quarter 1999, up 2.2 percent from $67.5 billion for fourth-quarter 1998. That compares with fourth-quarter written premium growth of 1.2 percent for 1998 over 1997 and 1.7 percent for 1997 over 1996.

TWELVE MONTHS	1998	1999
NET WRITTEN PREMIUM	287,013	281,621
NET EARNED PREMIUM	282,943	277,690
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	222,246	211,771
STATUTORY UNDERWRITING GAIN (LOSS)	(20,079)	(12,015)
POLICYHOLDERS' DIVIDENDS	3,314	4,749
NET UNDERWRITING GAIN (LOSS)	(23,393)	(16,764)
PRE-TAX OPERATING INCOME	13,863	23,354
NET INVESTMENT INCOME EARNED	38,605	39,925
NET REALIZED CAPITAL GAIN (LOSS)	13,691	18,019
NET INVESTMENT GAIN	52,296	57,945
NET INCOME AFTER TAXES	22,170	30,773
SURPLUS (CONSOLIDATED)	336,259	333,327
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	363,454	364,196
COMBINED RATIO, POST-DIVIDENDS, PERCENT	107.9	105.6
FOURTH QUARTER	1998	1999
NET WRITTEN PREMIUM	68,996	67,539
NET EARNED PREMIUM	71,890	69,893
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	58,078	54,802
STATUTORY UNDERWRITING GAIN (LOSS)	(6,442)	(4,794)
POLICYHOLDERS' DIVIDENDS	1,508	1,794
NET UNDERWRITING GAIN (LOSS)	(7,950)	(6,588)
PRE-TAX OPERATING INCOME	1,983	3,874
NET INVESTMENT INCOME EARNED	10,237	10,592
NET REALIZED CAPITAL GAIN (LOSS)	2,773	5,949
NET INVESTMENT GAIN	13,010	16,541
NET INCOME AFTER TAXES	4,505	7,488
SURPLUS (CONSOLIDATED)	336,259	333,327
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	363,454	365,196
COMBINED RATIO, POST-DIVIDENDS, PERCENT	112.2	110.4

Release: Immediate

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

Sue McKenna (NAII)
(847) 297-7800

Loretta Worters (III)
(212) 669-9200