Property/Casualty Industry's First-Half Net Income Drops as Underwriting Losses Mount and Investment Results Deteriorate

January 1, 2011 / 8 min read

NEW YORK, Sept. 8, 1999 – An almost one-third increase in net losses on underwriting and a 3 percent decline in pre-tax net investment gains pushed the U.S. property/casualty industry's first-half 1999 net income after taxes down to $15.1 billion, 3.5 percent below the $15.7 billion in first-half 1998, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

The industry's net underwriting loss amounted to $8 billion for first-half 1999, 32.1 percent more than the $6 billion net loss on underwriting for first-half 1998. The industry's pre-tax net investment gain (the sum of net investment income and realized capital gains) fell to $27.2 billion in the first half of 1999, down from $28 billion in the first half of 1998. A decline in the industry's federal income taxes partially offset the deterioration in underwriting and investment results.

Weak premium growth and increased loss and loss-adjustment expenses contributed to the deterioration in underwriting results. Industry net written premiums for first-half 1999 were $143.4 billion, up just 1 percent from $141.9 billion a year ago. The 1 percent written premium growth rate in first-half 1999 is down from 2.3 percent in first-half 1998 and 3.8 percent in first-half 1997. Industry loss and loss-adjustment expenses rose to $106.1 billion in the first half of 1999, up 2.5 percent from $103.4 billion in first-half 1998. The 2.5 percent increase in loss and loss-adjustment expenses for first-half 1999 compares with a 5.2 percent increase in first-half 1998 and a 4.8 percent decline in first-half 1997.

"The 1 percent growth in written premium for first-half 1999 is the lowest first-half premium growth rate in at least a dozen years. If growth continues at this pace through year-end, premium growth for all of 1999 will be well short of last year's record-low 1.8 percent," said John J. Kollar, ISO's vice president for consulting and research. "One might expect poor premium growth when the economy is in recession, but the economy has been strong. In the first half of 1999,adjusted for inflation, the nation's gross domestic product rose 3.9 percent compared with year-ago levels, and the civilian unemployment rate fell to an average of just 4.3 percent,"added Kollar.

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.

The first-half combined ratio — a measure of losses and underwriting expenses per dollar of premium — was 104.9 percent, 1.3 percentage points worse than the industry's 103.6 percent combined ratio for first-half 1998.

The net loss on underwriting in first-half 1999 amounted to 5.7 percent of the $139.2 billion in premiums earned during the period, up from 4.4 percent of the $137.9 billion in premiums earned during the first half of 1998. The underwriting loss in the first half of 1999 included $1.2 billion of premiums returned to policyholders as dividends, down from $2.1 billion in the first half of 1998.

"The adverse effects of weak premium growth were compounded by an increase in overall loss and loss and loss-adjustment expenses," observed Diana Lee, the NAII's vice president for research services. "If catastrophe losses had been the same as they were last year, the industry's combined ratio for first-half 1999 would have been 105.1 percent," said Lee.

According to ISO's Property Claim Services unit, first-half 1999 catastrophe losses totaled $5.2 billion, down 5.1 percent from $5.5 billion in first-half 1998. Other loss and loss-adjustment expenses rose to $100.8 billion in first-half 1999, up 3 percent from $97.9 billion in first-half 1998.

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

The first-half 1999 decline in the industry's net investment gain reflected weakening in both net investment income and realized capital gains. The industry's net investment income (primarily dividends earned from stocks and interest on bonds) declined to $19 billion in the first half of 1999, down 2.9 percent from $19.6 billion in first-half 1998. The industry's realized capital gains dropped to $8.2 billion for the first six months of 1999, down 3.2 percent from $8.5 billion for the first six months of 1998.

"The decline in net investment income in the first half of 1999 is a delayed reflection of the downward trend in interest rates from 1994 to 1998. The average yield on ten-year U.S. Treasury bonds fell to 5.3 percent in 1998 from 7.1 percent in 1994," said Kollar. "But, on a month-to-month basis, there was an upward trend in interest rates during the first-half of this year, and the Federal Reserve Board hiked its discount rate by a quarter of a percent on August 24. If the upward trend in interest rates persists, we may soon see increases in the industry's investment income," added Kollar.

Insurers' unrealized capital gains dropped 78.9 percent to $3.4 billion for first-half 1999 from $16.2 billion for first-half 1998. Insurers' total capital gains – the sum of their realized capital gains and unrealized capital gains – fell to $11.6 billion in first-half 1999, down 53 percent from $24.6 billion for first-half 1998.

"The decline in total capital gains in the first half of 1999 reflects developments in financial markets," noted Lee. "Though the Standard & Poor's 500 index of common-stock prices rose 11.7 percent in the first half of this year, that gain compares with a 16.8 percent increase in the first half of 1998. One concern going forward is the possibility that increases in interest rates will lead to declines in stock prices and capital losses," added Lee.

The industry's pre-tax operating income — the sum of its gain or loss on underwriting, net investment income, and other miscellaneous income — declined 15.7 percent to $11.2 billion in the first half of 1999 from $13.2 billion in the same period a year ago. The effects of lower pre-tax operating income and realized capital gains on the industry's net income after taxes were partially mitigated by a fall in its federal income taxes, which dropped to $4.2 billion in the first half of 1999 from $6 billion in the first half of 1998.

The industry's consolidated surplus — its assets minus liabilities — increased $8 billion to $341.3 billion as of June 30, 1999, up 2.4 percent from $333.3 billion at year-end 1998. Additions to surplus included $11.2 billion of operating income, $8.2 billion of realized capital gains, $3.4 billion of unrealized capital gains, and $0.5 billion of new funds. Charges against surplus included $4.2 billion of income taxes, $6.3 billion in stockholder dividends, and $4.8 billion of miscellaneous surplus changes.

Second-Quarter Results

For the second quarter of 1999, the industry's consolidated net after-tax income was $6.1 billion, compared with net income of $6.4 billion in second-quarter 1998 and net income of $9.0 billion in the first quarter of 1999.

Net income for second-quarter 1999 consisted primarily of $4.6 billion in pre-tax operating income and $3.3 billion in realized capital gains. The industry incurred $1.8 billion in federal income taxes in the second quarter of 1999, 34 percent less than the $2.7 billion incurred in second-quarter 1998.

The industry's second-quarter 1999 pre-tax operating income of $4.6 billion was down 2.9 percent from $4.7 billion in the period a year ago. Second-quarter 1999 operating income consisted of a pre-tax underwriting loss of $5 billion, pre-tax net investment income of $9.4 billion, and $0.2 billion in miscellaneous other income.

The second-quarter pre-tax underwriting loss of $5 billion was 2.8 percent less than the $5.2 billion underwriting loss in the second quarter of 1998. The decline in underwriting losses coincided with a fall in catastrophe losses to $3.4 billion in the second quarter of 1999 from $4.5 billion in the second quarter of 1998, as reported by ISO's Property Claim Services unit.

The second-quarter 1999 underwriting loss represents 7.1 percent of $70.2 billion in earned premiums, down from 7.4 percent of $69.6 billion in earned premiums for the second quarter of last year. The underwriting loss in the second quarter of 1999 included $0.5 billion of premiums returned to policyholders as dividends, down from $1.6 billion in second-quarter 1998.

The $9.4 billion of net investment income for the second quarter of 1999 was down 4 percent from $9.8 billion in the same period a year ago. Realized capital gains for second-quarter 1999 were $3.3 billion, compared with $4.3 billion in second-quarter 1998. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $12.7 billion in 1999's second quarter, compared with $14.1 billion in the second quarter of 1998.

Written premiums totaled $71.4 billion for second-quarter 1999, up 1.1 percent from $70.7 billion for second-quarter 1998. That compares with second-quarter written premium growth of 1.6 percent for 1998 over 1997 and 4.1 for 1997 over 1996.

OPERATING RESULTS FOR 1999 AND 1998
($ Millions)

FIRST HALF	1999	1998
NET WRITTEN PREMIUM	143,375	141,886
NET EARNED PREMIUM	139,206	137,920
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	106,053	103,446
STATUTORY UNDERWRITING GAIN (LOSS)	(6,782)	(3,885)
POLICYHOLDERS' DIVIDENDS	1,168	2,133
NET UNDERWRITING GAIN (LOSS)	(7,951)	(6,017)
PRE-TAX OPERATING INCOME	11,155	13,239
NET INVESTMENT INCOME EARNED	18,991	19,558
NET REALIZED CAPITAL GAIN (LOSS)	8,182	8,453
NET INVESTMENT GAIN	27,173	28,011
NET INCOME AFTER TAXES	15,133	15,687
SURPLUS (CONSOLIDATED)	341,281	334,013
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	362,600	365,972
COMBINED RATIO, POST-DIVIDENDS	104.9	103.6

SECOND QUARTER	1999	1998
NET WRITTEN PREMIUM	71,450	70,650
NET EARNED PREMIUM	70,208	69,640
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	54,488	53,608
STATUTORY UNDERWRITING GAIN (LOSS)	(4,476)	(3,533)
POLICYHOLDERS' DIVIDENDS	531	1,617
NET UNDERWRITING GAIN (LOSS)	(5,006)	(5,151)
PRE-TAX OPERATING INCOME	4,595	4,734
NET INVESTMENT INCOME EARNED	9,437	9,828
NET REALIZED CAPITAL GAIN (LOSS)	3,273	4,311
NET INVESTMENT GAIN	12,710	14,139
NET INCOME AFTER TAXES	6,113	6,384
SURPLUS (CONSOLIDATED)	341,281	334,013
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	362,600	365,972
COMBINED RATIO, POST-DIVIDENDS	106.6	107.0

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