Property/Casualty Industry's First-Half Net Income Plunges by a Third and Surplus Drops as Underwriting Results Deteriorate

January 1, 2011 / 9 min read

NEW YORK, Sept. 13, 2000 — The U.S. property/casualty industry's net income after taxes dropped to $10 billion in this year's first half, down 32.5 percent from $14.9 billion a year ago.

The industry's surplus fell $7.6 billion, or 2.3 percent, from year-end 1999 to $326.7 billion at June 30, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

The $4.8 billion decline in net income after taxes in this year's first half reflects a near doubling of the industry's net loss on underwriting to $14.7 billion from $7.8 billion for first-half 1999.

The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 109.2 percent in the first half of this year, 4.4 percentage points worse than the 104.8 percent a year ago.

"The 109.2 percent combined ratio for the first half of this year is the worst underwriting result for the first half of any year since the 111.2 percent in 1994, when the Northridge earthquake struck southern California," observed John J. Kollar, ISO's vice president for consulting and research.

"But, random swings in catastrophe losses can obscure underlying trends in fundamental underwriting results. Excluding catastrophe losses, the combined ratio for the first half of this year equals 107 percent, 6.1 percentage points worse than a year ago and the worst first-half combined ratio excluding catastrophe losses since the 107.2 percent in 1991," commented Diana Lee, the NAII's vice president for research services.

The decline in the industry's consolidated surplus — its assets minus its liabilities — from $334.3 billion at year-end 1999 to $326.7 billion at June 30, 2000, occurred despite $10 billion in net income after taxes and $1.4 billion in new funds paid in during this year's first half. Factors contributing to the decline in surplus include $9.1 billion in unrealized capital losses, $6.3 billion in dividends to shareholders, and $3.6 billion in miscellaneous charges against surplus.

Insurers' $9.1 billion in unrealized capital losses during this year's first half compare with $3.4 billion in unrealized capital gains during the first half a year ago. The $6.3 billion in dividends to shareholders during this year's first half compare with $6.4 billion in first-half 1999. The $3.6 billion in miscellaneous charges against surplus is down from $6.5 billion in such charges during the corresponding 1999 period.

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.

The first half's decline in net income after taxes reflects not only deterioration in underwriting results, but also a drop in realized capital gains to $7.5 billion from $7.8 billion in first-half 1999. Partially offsetting those adverse developments, the industry's net investment income rose to $19.4 billion in the first half of this year from $19.1 billion in the first half of last year; the industry's income from miscellaneous operations rose to $0.8 billion from $0.1 billion; and the industry's federal income taxes fell to $3 billion from $4.4 billion.

Net losses on underwriting escalated in this year's first half despite acceleration in premium growth and lower catastrophe losses. Industry net written premiums for first-half 2000 were $149.3 billion, up $6 billion, or 4.2 percent, from $143.3 billion in the period a year ago. The 4.2-percent increase in written premiums compares with a 1-percent increase in the first half of 1999 and is the largest first-half increase in premiums since 1993. Catastrophe losses fell to $3.2 billion in first-half 2000 from $5.3 billion in first-half 1999, according to ISO's Property Claim Services (PCS) unit.

The deterioration in underwriting results reflects growth in overall loss and loss-adjustment expenses that exceeds premium growth. Overall loss and loss-adjustment expenses rose to $115.2 billion in first-half 2000, up $9.1 billion, or 8.6 percent, from $106.1 billion in first-half 1999, with non-catastrophe loss and loss-adjustment expenses climbing $11.3 billion, or 11.2 percent, to $112 billion in first-half 2000 from $100.7 billion in first-half 1999. The deterioration in underwriting results also reflects increases in other underwriting expenses, which grew 4.6 percent to $41.5 billion in first-half 2000 from $39.7 billion in first-half 1999, and growth in dividends to policyholders, which rose to $1.9 billion in the first half of 2000 from $1.2 billion in the corresponding period of 1999.

"There are some positives in the numbers, such as acceleration in premium growth. But insurers' underwriting results will continue to deteriorate as long as growth in losses outpaces growth in premiums," observed Kollar. "And, with the nation's gross domestic product up 7.6 percent in first-half 2000 from a year ago, premium growth continues to lag economic growth. That suggests reports that the insurance pricing cycle has turned may be premature," added Kollar.

"According to some traditional measures, such as premium-to-surplus ratios, the industry remains burdened by over-capacity," noted Lee. "Premium-to-surplus ratios measure the amount of risk supported by each dollar of surplus, and despite recent premium growth and the decline in surplus, the premium-to-surplus ratio for the twelve months ended June 30 is just 0.90, down from an average of 1.18 for the 1990s and 1.78 for the 1980s," added Lee.

The underwriting loss in first-half 2000 amounts to 10.2 percent of the $143.9 billion in premiums earned during the period, up from 5.6 percent of the $139.1 billion in premiums earned during the first half of 1999.

The industry's pre-tax net investment gain, which combines realized capital gains and net investment income (primarily dividends earned from stocks and interest on bonds), rose 0.1 percent in first-half 2000 compared with year-ago levels to $26.9 billion.

The industry's pre-tax operating income — the sum of its gain or loss on underwriting, its net investment income, and other miscellaneous income — declined 52.1 percent to $5.5 billion in the first half of 2000 from $11.4 billion in the same period a year ago.

Insurers suffered total capital losses — realized and unrealized — of $1.6 billion in first-half 2000, compared with $11.2 billion in total capital gains a year ago.

"Insurers' total capital losses for first-half 2000 and their total capital gains for first-half 1999 both reflect developments in financial markets beyond insurers' control," said Lee. "The S&P 500, a widely used index of common stock prices, declined 1 percent from year-end 1999 to June 30, 2000, but rose 11.7 percent during the first half of 1999. Whether insurers will suffer further capital losses or enjoy overall capital gains in the third quarter of 2000 and beyond depends on where the stock market goes from here," added Lee.

Second-Quarter Results

For the second quarter of 2000, the industry's consolidated net income after taxes was $4.1 billion, compared with net income of $6 billion in second-quarter 1999 and net income of $5.9 billion in the first quarter of 2000.

Net income for second-quarter 2000 consists primarily of $1.4 billion in pre-tax operating income and $4.1 billion in realized capital gains. The industry incurred $1.3 billion in federal income taxes in the second quarter of 2000, 28.4 percent less than the $1.8 billion incurred in second-quarter 1999.

The industry's second-quarter 2000 pre-tax operating income fell 71.4 percent to $1.4 billion from $4.7 billion in the period a year ago. Second-quarter 2000 operating income consisted of a pre-tax underwriting loss of $8.7 billion, pre-tax net investment income of $9.6 billion, and $0.5 billion in miscellaneous other income.

The second-quarter pre-tax underwriting loss of $8.7 billion was 77.7 percent more than the $4.9 billion underwriting loss in the second quarter of 1999. Underwriting losses increased even though catastrophe losses fell to $1.5 billion in the second quarter of 2000 from $3.5 billion in the second quarter of 1999, as reported by ISO's PCS unit.

The second-quarter 2000 underwriting loss represents 12 percent of $72.9 billion in earned premiums, up from 7 percent of $70.2 billion in earned premiums for the second quarter of last year. The underwriting loss in the second quarter of 2000 includes $1.4 billion of premiums returned to policyholders as dividends, up from $0.5 billion in second-quarter 1999.

The $9.6 billion of net investment income for the second quarter of 2000 was up 1 percent from $9.5 billion in the period a year ago. Realized capital gains for second-quarter 2000 were $4.1 billion, compared with $3.1 billion in second-quarter 1999. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $13.7 billion in 2000's second quarter, compared with $12.6 billion in the second quarter of 1999.

Written premiums totaled $75.2 billion for second-quarter 2000, up 5.2 percent from $71.4 billion for second-quarter 1999. That compares with second-quarter written premium growth of 1.1 percent for 1999 over 1998 and 1.6 percent for 1998 over 1997.

OPERATING RESULTS FOR 2000 and 1999
($ Millions)

FIRST HALF	2000	1999
NET WRITTEN PREMIUM	149,301	143,335
NET EARNED PREMIUM	143,864	139,131
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	115,154	106,065
STATUTORY UNDERWRITING GAIN (LOSS)	(12,793)	(6,608)
POLICYHOLDERS' DIVIDENDS	1,937	1,180
NET UNDERWRITING GAIN (LOSS)	(14,730)	(7,788)
PRE-TAX OPERATING INCOME	5,482	11,440
NET INVESTMENT INCOME EARNED	19,405	19,114
NET REALIZED CAPITAL GAIN (LOSS)	7,510	7,779
NET INVESTMENT GAIN	26,914	26,892
NET INCOME AFTER TAXES	10,031	14,865
SURPLUS (CONSOLIDATED)	326,708	339,341
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	358,132	361,175
COMBINED RATIO, POST-DIVIDENDS (%)	109.2	104.8

SECOND QUARTER	2000	1999
NET WRITTEN PREMIUM	75,156	71,430
NET EARNED PREMIUM	72,852	70,170
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	59,061	54,494
STATUTORY UNDERWRITING GAIN (LOSS)	(7,312)	(4,388)
POLICYHOLDERS' DIVIDENDS	1,438	536
NET UNDERWRITING GAIN (LOSS)	(8,749)	(4,924)
PRE-TAX OPERATING INCOME	1,357	4,740
NET INVESTMENT INCOME EARNED	9,595	9,498
NET REALIZED CAPITAL GAIN (LOSS)	4,076	3,112
NET INVESTMENT GAIN	13,671	12,609
NET INCOME AFTER TAXES	4,131	6,033
SURPLUS (CONSOLIDATED)	326,708	339,341
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	358,132	361,175
COMBINED RATIO, POST-DIVIDENDS (%)	111.1	106.5

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