Hurricanes and Wind Storms Drive Property/Casualty Industry's Net Income

January 1, 2011 / 7 min read

NEW YORK, Dec. 7, 1998 — The U.S. property/casualty insurance industry posted $23.2 billion in net income after tax for the first nine months of 1998, down 15.0 percent from $27.4 billion for nine-months 1997, primarily because of higher catastrophe losses, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

" Based on catastrophe losses through the first nine months of the year, 1998 has already qualified as the fifth worst year since 1950 for catastrophe losses, even when inflation is taken into account," observed John Kollar, ISO's vice president for actuarial services and research. "The increase in catastrophe losses by itself accounts for almost three-quarters of the decline in insurers' operating income," said Kollar.

The $23.2 billion in net income included $19.1 billion in operating income and $12.5 billion in realized capital gains. Operating income for the first nine months of 1998 was down 29.8 percent from $27.2 billion in nine-months 1997. Realized capital gains increased 78.8 percent from $7 billion for the comparable period a year ago. Net investment income, together with realized capital gains, brought the industry's total pre-tax net investment gain for nine-months 1998 to $41.6 billion, up 8.5 percent from $38.3 billion for nine-months 1997.

The industry incurred $8.3 billion in income taxes for nine months of 1998, 21.9 percent more than the $6.8 billion in income taxes for nine-months 1997.

The figures are consolidated estimates for the entire industry based on the reports of insurers that account for more than 96 percent of the country's property/casualty insurance business.

According to ISO's Property Claim Services (PCS) unit, catastrophe losses for nine-months 1998 totaled $8.3 billion, compared with $2.4 billion in nine-months 1997.

The industry's $19.1 billion in pre-tax operating income through nine-months 1998 included a pre-tax underwriting loss of $10.1 billion and pre-tax net investment income of $29.1 billion. The pre-tax underwriting loss for the period was more than twice the $4.2 billion loss during the comparable period in 1997. Had catastrophe losses remained the same as they were in nine-months 1997, the industry's pre-tax underwriting loss for nine-months 1998 would have fallen 0.3 percent to $4.2 billion.

As a result of worsening loss experience, the combined ratio — a measure of losses and other expenses per dollar of premium — deteriorated to 104.1 in nine-months 1998 from 101.1 in nine-months 1997.

The underwriting loss for nine-months 1998 was 4.9 percent of earned premiums of $207.1 billion, 2.8 percentage points higher than the 2.1 percent underwriting loss on earned premiums of $202.2 billion for nine-months 1997. The nine-months 1998 underwriting loss reflected $2.9 billion of premiums returned to policyholders as dividends, an increase of 15.1 percent from $2.6 billion in nine-months 1997.

Net written premium for nine-months 1998 totaled $213.3 billion, up 1.6 percent from $209.9 billion in nine-months 1997. The corresponding nine-month written premium growth rate was 3.3 percent for 1997 and 3 percent for 1996.

"If premium growth continues at this pace in the fourth quarter, full-year premium growth for the industry may fall to a record low," said Diana Lee, the NAII's vice president for research services. " Based on data going back to 1960, full-year premium growth has never dropped below 2 percent," Lee added.

"The weakness in premium growth is at odds with the strength in the economy during the first nine months of the year," observed Lee. "The gross domestic product of the United States, measured in current dollars, rose 4.9 percent during the period, compared with the period a year ago."

The $29.1 billion of net investment income (primarily dividends earned from stocks and interest on bonds) was down 7.1 percent from $31.3 billion in 1997. The drop in investment income is not, however, representative of the experience of individual insurers, since the $31.3 billion in investment income in nine-months 1997 included approximately $2.3 billion in special dividends received by two property/casualty insurers from affiliated life insurance companies. Excluding those special dividends, net investment income in nine-months 1998 was 0.1 percent above net investment income in nine-months 1997.

"Investment income growth hasn't been this weak since 1993," said Lee. "That year, the industry's net investment income actually declined 3.2 percent, compared to the industry's net investment income for 1992."

The industry's consolidated surplus — its assets minus liabilities — increased $2.2 billion, or 0.7 percent, to $310.7 billion as of September 30, 1998, from $308.5 billion at year-end 1997. Additions to surplus included $19.1 billion of operating income, $12.5 billion of realized capital gains, and $2.3 billion of new funds. Charges against surplus included $8.3 billion in income taxes, $9.6 billion in stockholder dividends, $10.4 billion in unrealized capital losses, and $3.3 billion in miscellaneous surplus changes.

"The $2.2 billion increase in surplus during the first nine months of 1998 compares with a $39.2 billion increase in surplus during the first nine months of 1997," noted Kollar. "Much of the slowdown in the growth of surplus is attributable to a reduction in capital gains. The industry's total capital gains, including both realized and unrealized gains and losses, amounted to $2 billion for nine months, down from $29.6 billion for nine-months 1997," he said.

"The reduction in total capital gains reflects the weakness in stock markets during the third quarter of 1998," Lee said. "The S&P 500 — a widely followed measure of stock prices — rose 16.8 percent during the first six months of the year but then fell 10.3 percent in the third quarter, cutting its gain for the first nine months of 1998 to just 4.8 percent. That gain compares with a 27.9 percent increase during the first nine months of 1997."

Third-Quarter Results

For the third quarter of 1998, the industry's consolidated net after-tax income was $7.3 billion, compared with net income of $8.6 billion in third-quarter 1997.

Net income for third-quarter 1998 consisted of pre-tax operating income of $5.9 billion and $3.7 billion of realized capital gains. The industry incurred $2.3 billion in income taxes in the third quarter of 1998, 5.8 percent less than the $2.4 billion incurred in third-quarter 1997.

The industry's third-quarter 1998 pre-tax operating income of $5.9 billion was down 26.9 percent from $8 billion a year ago. Third-quarter 1998 operating income consisted primarily of a pre-tax underwriting loss of $4.1 billion and pre-tax net investment income of $9.7 billion.

The third-quarter pre-tax underwriting loss of $4.1 billion was 106.1 percent more than the $2 billion underwriting loss in the third quarter of 1997. The decline in underwriting results coincided with a rise in catastrophe losses to $3.7 billion in the third quarter of 1998 from $0.5 billion in the third quarter of 1997, as reported by ISO's PCS unit.

The third-quarter 1998 underwriting loss represents 6 percent of $69.7 billion in earned premiums, up from 2.9 percent of $68.4 billion in earned premiums for the third quarter of last year. The underwriting loss in the third quarter of 1998 included $0.8 billion of premiums returned to policyholders as dividends, down from $1.4 billion in third-quarter 1997.

The $9.7 billion of net investment income for the third quarter of 1998 was down 1.7 percent from $9.9 billion in the same period a year ago. Realized capital gains for third-quarter 1998 were $3.7 billion, compared with $3.1 billion in third-quarter 1997. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $13.4 billion in third-quarter 1998, compared with $12.9 billion in the third quarter of 1997.

Written premiums totaled $71.9 billion for third-quarter 1998, up 1.1 percent from $71.1 billion for third-quarter 1997. This compares with third-quarter written premium growth rates of 2.3 percent for 1997 over 1996 and 3.2 percent for 1996 over 1995.

OPERATING RESULTS FOR 1998 AND 1997
($ Millions)

FIRST NINE MONTHS	1998	1997
NET WRITTEN PREMIUM	213,269	209,858
NET EARNED PREMIUM	207,143	202,233
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	156,035	148,382
STATUTORY UNDERWRITING GAIN (LOSS)	(7,202)	(1,661)
POLICYHOLDERS' DIVIDENDS	2,945	2,558
NET UNDERWRITING GAIN (LOSS)	(10,147)	(4,219)
PRE-TAX OPERATING INCOME	19,105	27,212
NET INVESTMENT INCOME EARNED	29,096	31,312
NET REALIZED CAPITAL GAIN (LOSS)	12,454	6,967
NET INVESTMENT GAIN	41,551	38,279
NET INCOME AFTER TAXES	23,242	27,358
SURPLUS (CONSOLIDATED)	310,700	294,764
COMBINED RATIO, POST-DIVIDENDS	104.1	101.1

THIRD QUARTER
NET WRITTEN PREMIUM	71,922	71,140
NET EARNED PREMIUM	69,657	68,365
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	53,205	50,086
STATUTORY UNDERWRITING GAIN (LOSS)	(3,326)	(597)
POLICYHOLDERS' DIVIDENDS	819	1,414
NET UNDERWRITING GAIN (LOSS)	(4,146)	(2,011)
PRE-TAX OPERATING INCOME	5,852	8,008
NET INVESTMENT INCOME EARNED	9,696	9,861
NET REALIZED CAPITAL GAIN (LOSS)	3,732	3,051
NET INVESTMENT GAIN	13,429	12,913
NET INCOME AFTER TAXES	7,310	8,643
SURPLUS (CONSOLIDATED)	310,700	294,764
COMBINED RATIO, POST-DIVIDENDS	105.1	101.9

Release: Immediate

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

Sue McKenna (NATIONAL ASSOCIATION OF INDEPENDENT INSURERS)
(847) 297-7800