Low Premium Growth and High Catastrophe Losses Among Factors Depressing Property/Casualty Insurers' 1998 Net Income

January 1, 2011 / 7 min read

New York, March 25, 1999 — A combination of factors — including record-low premium growth, surging catastrophe losses, reduced investment income and higher income taxes — cut U.S. property/casualty insurers' 1998 net income 16.1 percent to $30.9 billion, down from $36.8 billion in 1997, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

Reflecting the record-low premium growth, increased catastrophe losses and the decline in investment income, the industry's operating income before tax dropped to $23.0 billion in 1998 from $35.5 billion in 1997. The industry's net income after tax was also adversely affected by a $1.2 billion increase in the industry's tax bill to $10.7 billion. The adverse trends in pretax operating income and income taxes were partially offset by a $7.8 billion increase in the industry's realized capital gains to $18.6 billion.

"With premium growth falling to just 1.4 percent and catastrophe losses rising by $7.5 billion to $10.1 billion, the industry's net loss on underwriting nearly tripled to $16.7 billion in 1998 from $5.8 billion in 1997," said John Kollar, ISO's vice president for consulting and research. "The weakness in premium growth does not bode well for the industry's income going forward, and catastrophe losses may continue to be a problem. Catastrophe losses in January 1999 alone exceeded those in the entire first quarter of last year, and experts are predicting an active hurricane season in 1999," he added.

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.

The industry's loss and loss-adjustment expenses increased 6.5 percent to $210.5 billion in 1998,with much of the increase attributable to higher catastrophe losses. According to ISO's Property Claim Services unit, catastrophe losses for 1998 totaled $10.1 billion, compared with $2.6 billion for 1997. As a result of weak premium growth and adverse loss experience in 1998,the combined ratio — a measure of losses and other expenses per dollar of premium - deteriorated to 105.7 last year from 101.6 in 1997.

"The increase in catastrophe losses accounts for more than half the increase in the industry's combined ratio. But, even if catastrophe losses had remained at the 1997 level, the industry's combined ratio would still have deteriorated to 103.0," observed Diana Lee, the NAII's vice president for research services. "Excluding catastrophes, the industry's loss and loss-adjustment expenses rose 2.7 percent in 1998 after declining 2 percent in 1997, while other underwriting expenses rose 4.5 percent in 1998. Both these rates of change exceed the industry's premium growth," she noted.

The underwriting loss for 1998 was 6 percent of earned premiums of $276.8 billion, up from 2.1 percent of earned premiums of $271.5 billion for 1997. The 1998 underwriting loss reflected $4.73 billion of premiums returned to policyholders as dividends, an increase of 0.9 percent from $4.69 billion in 1997.

Net written premium for 1998 totaled $280.6 billion, up 1.4 percent from $276.6 billion for 1997. This compares with written premium growth rates of2.9 percent for 1997 over 1996 and 3.4 percent for 1996 over 1995. Net earned premium for 1998 totaled $276.8 billion, up 2 percent from $271.5 billion for 1997.

"The industry's written premium growth has been slowing since it peaked at 6.1 percent in 1993, and, based on data going back to 1960, premium growth never fell below 2 percent until last year," said Kollar. "The weakness in premium growth is particularly disappointing in view of the economy's strength. The 1.4 percent increase in net written premium last year compares with a 4.9 percent increase in U.S. gross domestic product, a broad measure of overall economic activity."

The industry's $39.6 billion of net investment income (primarily dividends earned from stocks and interest on bonds) was down 4.6 percent from $41.5 billion in 1997. But the industry's 1997 investment income benefited from $2.3 billion in one-time special dividends received by two property/casualty insurers as affiliated life insurers were spun off. Excluding those 1997 special dividends, the industry's net investment income rose 0.9 percent in 1998.

Realized capital gains of $18.6 billion in 1998 were up 72 percent from $10.8 billion in 1997. Net investment income together with realized capital gains brought the industry's total pre-tax net investment gain for 1998 to $58.2 billion, up 11.3 percent from $52.3 billion for 1997.

The industry's consolidated surplus — its assets minus liabilities - increased 8.1 percent to $333.5 billion as of December 31, 1998 from $308.5 billion at year-end 1997. Additions to surplus included $23.0 billion of operating income, $18.6 billion of realized capital gains, $10.1 billion of unrealized capital gains, and $5.1 billion of new funds. Charges against surplus included $10.7 billion of income taxes, $13.3 billion of stockholder dividends, and $7.7 billion in miscellaneous surplus changes. Dividing premiums for 1998 by surplus for 1998 shows that the industry's premium-to-surplus ratio fell to a record low 0.84, down from 0.90 for 1997.

"Capital gains due to booming financial markets account for the growth in the industry's surplus," noted Lee. "The Standard & Poor's 500 Index rose 31 percent in 1997 and another 27 percent in 1998. Whether financial markets will continue heading higher, and whether capital gains will continue offsetting weaknesses in insurers' operating results, is anybody's guess."

Fourth-Quarter Results

For the fourth quarter of 1998, the industry's net after-tax income was $7.7 billion, compared with net income of $9.5 billion in fourth-quarter 1997 and $7.3 billion of net income in the third quarter of 1998.

Net income for fourth-quarter 1998 consisted of pre-tax operating income of $3.9 billion and $6.1 billion of realized capital gains. The industry incurred $2.3 billion in income taxes in the fourth quarter of 1998, 10.9 percent less than the $2.6 billion incurred in fourth-quarter 1997.

The industry's pre-tax operating income fell 53 percent to $3.9 billion in fourth-quarter 1998 from$8.3 billion in the same period a year ago. Fourth-quarter 1998 operating income consisted primarily of a pre-tax underwriting loss of $6.6 billion and pre-tax net investment income of $10.5 billion.

The fourth-quarter pre-tax underwriting loss of $6.6 billion was 308.2 percent more than the $1.6 billion underwriting loss in the fourth quarter of 1997.

The underwriting loss in fourth-quarter 1998 amounts to 9.4 percent of the $69.7 billion in premiums earned during the quarter, up from 2.3 percent of the $69.3 billion in premiums earned during the fourth quarter of 1997. The underwriting loss in the fourth quarter of 1998 included $1.8 billion of premiums returned to policyholders as dividends, down from $2.1 billion in the fourth quarter of 1997.

The $10.5 billion of net investment income in the fourth quarter of 1998 was up 3.1 percent from $10.2 billion in the period a year ago. Realized capital gains for fourth-quarter 1998 were $6.1 billion, compared with $3.8 billion in fourth-quarter 1997. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $16.6 billion in 1998's fourth quarter, compared with $14.0 billion in 1997's fourth quarter.

Written premiums totaled $67.3 billion for fourth-quarter 1998, up 0.9 percent from $66.7 billion for fourth-quarter 1997. This compares with fourth-quarter written premium growth rates of1.7 percent for 1997 over 1996 and 4.7 percent for 1996 over 1995.

OPERATING RESULTS FOR 1998 AND 1997
($Millions)

FULL YEAR	1998	1997
NET WRITTEN PREMIUM	280,552	276,568
NET EARNED PREMIUM	276,816	271,502
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	210,513	197,735
STATUTORY UNDERWRITING GAIN (LOSS)	(11,980)	(1,136)
POLICYHOLDERS' DIVIDENDS	4,733	4,691
NET UNDERWRITING GAIN (LOSS)	(16,713)	(5,827)
PRE-TAX OPERATING INCOME	22,982	35,469
NET INVESTMENT INCOME EARNED	39,603	41,499
NET REALIZED CAPITAL GAIN (LOSS)	18,593	10,808
NET INVESTMENT GAIN	58,196	52,307
NET INCOME AFTER TAXES	30,908	36,819
SURPLUS (CONSOLIDATED)	333,524	308,479
COMBINED RATIO, POST-DIVIDENDS	105.7	101.6

FOURTH QUARTER

NET WRITTEN PREMIUM	67,283	66,710
NET EARNED PREMIUM	69,673	69,269
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	54,478	49,353
STATUTORY UNDERWRITING GAIN (LOSS)	(4,778)	525
POLICYHOLDERS' DIVIDENDS	1,788	2,133
NET UNDERWRITING GAIN (LOSS)	(6,566)	(1,608)
PRE-TAX OPERATING INCOME	3,877	8,257
NET INVESTMENT INCOME EARNED	10,506	10,187
NET REALIZED CAPITAL GAIN (LOSS)	6,139	3,841
NET INVESTMENT GAIN	16,645	14,028
NET INCOME AFTER TAXES	7,666	9,461
SURPLUS (CONSOLIDATED)	333,524	308,479
COMBINED RATIO, POST-DIVIDENDS	110.4	103.4

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