The U.S. property/casualty industry’s net income after taxes rose 20.6 percent to $6.4 billion in first-quarter 2003 from $5.3 billion in first-quarter 2002, driven by improved underwriting results and an increase in net investment gains, according to Insurance Services Office Inc. (ISO) and the National Association of Independent Insurers (NAII).
The industry’s net loss on underwriting declined 59.9 percent to $1.5 billion in first-quarter 2003 from $3.6 billion in first-quarter 2002. The industry’s pre-tax net investment gain—the sum of net investment income (primarily dividends earned from stocks and interest on bonds) and realized capital gains—rose $0.7 billion, or 7.6 percent, to $10.1 billion in first-quarter 2003 from $9.4 billion in first-quarter 2002.
Net investment gains rose as a result of a $0.7-billion increase in realized capital gains to $1.1 billion in first-quarter 2003 from $0.3 billion in first-quarter 2002. Net investment income dropped 0.3 percent to $9 billion for the first three months of this year.
The combined ratio—a key measure of losses and other underwriting expenses per dollar of premium—improved 2.6 percentage points to 99.5 percent in first-quarter 2003 from 102.2 percent in the corresponding quarter of 2002.
“The 99.5-percent combined ratio for first-quarter 2003 is the best combined ratio for any quarter since the start of our records in 1986,” said John Kollar, ISO’s vice president for consulting and research. “Perhaps more remarkable is that the combined ratio was an even better 97 percent excluding results for one insurer that undertook significant reserve strengthening in first-quarter 2003. These results clearly show that insurers are focusing on the fundamentals of the property/casualty business—pricing, underwriting and loss adjudication—to fuel their continuing recovery from the soft market of the 1990s and the tragic events of September 11, 2001.”
“With the investment environment being what it is, insurers have little choice but to focus on the fundamentals of the underwriting business,” added Don Griffin, NAII assistant vice president for business and personal lines. “The 0.3-percent decline in investment income in first-quarter 2003 follows declines of 2.8 percent for full-year 2002 and 7.3 percent for full-year 2001. With the average yield on 10-year Treasury notes falling to 3.57 percent in May—its lowest monthly average since August 1958—investment income is apt to remain weak for some time to come.”
Other factors contributing to the industry’s net income included $0.1 billion in miscellaneous other income, up from negative $0.2 billion in first-quarter 2002.
The industry’s federal income taxes jumped $2.2 billion to $2.4 billion in first-quarter 2003 from $0.2 billion in first-quarter 2002.
The figures are consolidated estimates for the entire industry based on the reports of insurers that account for 96 percent of the country’s property/casualty insurance business.
Net losses on underwriting declined in first-quarter 2003 because growth in earned premiums exceeded growth in loss and loss-adjustment expenses, other underwriting expenses, and dividends to policyholders. Earned premiums rose $11.2 billion, or 13.6 percent, to $93.6 billion in first-quarter 2003 from $82.4 billion a year earlier. Loss and loss-adjustment expenses increased $6.8 billion, or 10.7 percent, to $70 billion in first-quarter 2003 from $63.2 billion in first-quarter 2002. Other underwriting expenses grew 9.9 percent, rising to $24.8 billion in the first quarter of this year from $22.5 billion in the same period last year. Dividends to policyholders fell 5.5 percent to $0.3 billion in first-quarter 2003 from $0.4 billion in first-quarter 2002.
The underwriting loss in this year’s first quarter amounts to 1.6 percent of the $93.6 billion in premiums earned during the quarter, down from 4.4 percent of the $82.4 billion in premiums earned during first-quarter 2002.
“Measured relative to earned premium, the industry’s net loss on underwriting hasn’t been this small since first-quarter 1998,” noted Griffin. “The net loss on underwriting for that quarter was just 1.3 percent of the premiums earned during the period.”
The industry’s underwriting results in first-quarter 2003 improved in spite of higher catastrophe losses. According to ISO’s Property Claim Services unit, during the first three months of 2003, insurers suffered $1.5 billion in catastrophe losses—two-and-a-half times the $0.6 billion in catastrophe losses in first-quarter 2002. Other loss and loss-adjustment expenses rose 9.4 percent to $68.5 billion in first-quarter 2003 from $62.6 billion in first-quarter 2002.
The 10.7-percent increase in overall loss and loss-adjustment expenses in first-quarter 2003 compares with an 8.6-percent increase in fourth-quarter 2002 and a 4.2-percent increase in first-quarter 2002.
The 9.9-percent increase in other underwriting expenses in first-quarter 2003 compares with a 7.4-percent increase in fourth-quarter 2002 and a 5-percent increase in first-quarter 2002.
The 5.5-percent decrease in dividends to policyholders in first quarter 2003 compares with an 18.3-percent decrease in fourth-quarter 2002 and a 12.2-percent decrease in first-quarter 2002. Industry net written premiums rose $11.5 billion to $101.3 billion in this year’s first quarter from $89.9 billion in first-quarter 2002. The 12.7 percent year-over-year increase in written premiums in first quarter 2003 compares with year-over-year growth rates of 15.6 percent in fourth-quarter 2002 and 9.8 percent in first-quarter 2002.
“The progressive slowing in premium growth from a peak of 16.6 percent in third quarter 2002 to 15.6 percent in fourth-quarter 2002 and 12.7 percent in first-quarter 2003 is consistent with ISO MarketWatch™ data, which shows rate changes on renewals for commercial lines policies peaking in mid-2002 and losing momentum ever since,” said Kollar. “This could be very positive for both insurers and buyers of insurance if it signals an orderly transition to a period of stability in insurance markets. But history suggests that each improvement in underwriting results brings us one step closer to the onset of the next soft market, reigniting the cycles of boom and bust that have made life so difficult for insurers and insureds.”
The industry’s pre-tax operating income—the sum of its gain or loss on underwriting, its net investment income, and other miscellaneous income—rose $2.5 billion to $7.7 billion in first-quarter 2003 from $5.1 billion in first-quarter 2002.
The industry’s consolidated surplus—its assets minus its liabilities—rose $3.9 billion, or 1.4 percent, to $289.2 billion at March 31, 2003, from $285.2 billion at Dec. 31, 2002.
Additions to surplus in the first quarter included $6.4 billion in net income after taxes, $0.2 billion in new funds paid in, and $1.1 billion in other miscellaneous surplus changes. These additions more than offset deductions from surplus, including $1.8 billion in unrealized capital losses on investments and $1.9 billion in dividends to shareholders.
“While the growth in surplus in first-quarter 2003 is certainly a welcome development, insurers still have a long way to go in terms of recovering from 9/11 and the competitive excesses of the last soft market,” observed Kollar. “Even with the $3.9 billion increase in surplus last quarter, surplus remains $50.2 billion, or 14.8 percent, below the $339.3 billion that surplus was at its peak in mid-1999.”
Insurers’ $1.8 billion in unrealized capital losses on investments in first-quarter 2003 compare with $0.6 billion in unrealized capital gains in first-quarter 2002. Combining realized capital gains and unrealized capital losses in first-quarter 2003, insurers suffered $0.8 billion in total capital losses during the period, in contrast to the $1 billion in total capital gains in first-quarter 2002.
“Insurers’ overall capital losses in first-quarter 2003 reflect developments in financial markets beyond their control, with the S&P 500 falling 3.6 percent during the period,” observed Griffin. “But stock markets have recovered a bit since March. With the S&P 500 being up 13.2 percent year-to-date through Friday, June 20, insurers may post some capital gains for second-quarter 2003.”
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