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P/C Industry’s Net Income Drops by a Third in First Quarter 2000

The U.S. property/casualty industry’s net income after taxes dropped 35.4 percent to $5.8 billion in first-quarter 2000, down from $9 billion in first-quarter 1999, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

Contributing to the decline in net income was a doubling of the industry’s net loss on underwriting to $6.1 billion in first-quarter 2000 from $2.9 billion in first-quarter 1999. In addition, the industry’s net gains on investments declined to $13.3 billion in first-quarter 2000 from $14.5 billion in first-quarter of 1999.

“The industry’s net loss on underwriting ballooned because growth in loss and loss adjustment expenses far exceeded growth in premiums, and underwriting results will continue to deteriorate so long as the large imbalance between growth in losses and growth in premiums persists,” said John J. Kollar, ISO’s vice president for consulting and research. “The decline in net gains on investments is consistent with developments in financial markets. In first-quarter 2000, the S&P 500 stock index rose just 2 percent, less than half of the 4.6 percent increase in first-quarter 1999,” added Kollar.

The underwriting loss in first-quarter 2000 amounts to 8.6 percent of the $71.1 billion in premiums earned during the quarter, up from 4.3 percent of the $69 billion in premiums earned during first-quarter 1999.

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.

Underwriting results deteriorated in first-quarter 2000, primarily because of a sharp increase in loss and loss adjustment expenses. The industry incurred $56.3 billion in loss and loss adjustment expenses in first-quarter 2000, up $4.7 billion or 9.1 percent from $51.6 billion in first-quarter 1999. The 9.1 percent increase in first-quarter 2000 compares with a 6 percent increase year-over-year in fourth-quarter 1999 and a 3.5 percent increase year-over-year in first-quarter 1999.

Overall loss and loss adjustment expenses increased in first-quarter 2000 even though catastrophe losses dipped. According to ISO’s Property Claim Services unit, first-quarter 2000 catastrophe losses totaled $1.7 billion, down from $1.8 billion in first-quarter 1999. Other loss and loss adjustment expenses totaled $54.5 billion in first-quarter 2000, up 9.7 percent from $49.7 in first-quarter 1999.

The deterioration in underwriting results in first-quarter 2000 also reflects an increase in other underwriting expenses. Such expenses rose to $20.5 billion in first-quarter 2000, up $0.7 billion, or 3.7 percent, from $19.7 billion in first-quarter 1999. The 3.7 percent increase in other underwriting expenses in the first quarter of this year compares with a 1.9 percent increase year-over-year in the fourth quarter of 1999 and a 5 percent increase year-over-year in the first quarter of 1999.

The industry’s net loss on underwriting doubled despite an increase in premium growth. Industry net written premiums for first-quarter 2000 were $74.2 billion, up 3.2 percent from $71.9 billion in the same period a year ago. The 3.2 percent increase in written premiums in the first quarter of 2000 compares with a 2.2 percent increase year-over-year in the fourth quarter of 1999 and a 1 percent increase year-over-year in the first quarter of 1999.

“Acceleration in premium growth is always good news from insurers’ perspective, but it is too soon to declare that the pricing cycle has turned. We’ve seen false starts before. For example, premium growth rose to 3.4 percent in the third quarter of 1999 but then fell to 2.2 percent in the fourth,” said Diana Lee, the NAII’s vice president for research services. “And, though the 3.2 percent growth in premiums in first-quarter 2000 exceeds the growth in the fourth-quarter of last year, growth in premiums remains weak compared to growth in the economy. The nation’s gross domestic product grew 6.9 percent in first-quarter 2000, compared to first-quarter 1999,” added Lee.

The combined ratio—a measure of losses and other underwriting expenses per dollar of premium—deteriorated to 107.4 percent in first-quarter 2000, 4.3 percentage points worse than the 103.1 percent combined ratio for the corresponding quarter 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), fell $1.2 billion in first-quarter 2000, compared with year-ago levels. Realized capital gains dropped $1.5 billion to $3.4 billion in first-quarter 2000 from $4.9 billion in first-quarter 1999. The decline in realized capital gains more than offset a $0.3 billion, or 2.9 percent, increase in net investment income to $9.8 billion in the first-quarter 2000 from $9.6 billion in the first quarter a year ago.

Insurers’ total capital gains—the sum of their realized capital gains or losses and their unrealized capital gains or losses—fell $2.2 billion, or 63.9 percent, to $1.2 billion in first-quarter 2000 from $3.5 billion in first-quarter 1999. The decline in total capital gains in first-quarter 2000 reflects the decrease in realized capital gains and a $0.7 billion increase in unrealized capital losses, which grew to $2.2 billion in first-quarter 2000 from $1.5 billion in first-quarter 1999.

“The turnaround in investment income may be the long-awaited effect of increases in interest rates. The Federal Reserve Board began raising interest rates on June 30, 1999, and last raised them on May 16 of this year, when it increased rates by 50 basis points,” observed Kollar. “But increases in interest rates cause bond prices to decline, and bonds account for about two thirds of insurers’ cash and invested assets. If the upward trend in interest rates continues, any insurers that need to sell bonds may be forced to realize losses.”

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 38.8 percent to $4 billion in the first quarter of 2000 from $6.6 billion in the same period a year ago.

The industry’s consolidated surplus—its assets minus liabilities—declined by $0.8 billion, or 0.2 percent, to $335.4 billion as of March 31, 2000, from $336.3 billion at year-end 1999. Additions to surplus in first-quarter 2000 included $5.8 billion in net income after taxes. Charges against surplus during the quarter included $2.2 billion in unrealized capital losses, $3.6 billion in dividends to shareholders, and $0.9 billion in miscellaneous charges against surplus.

“The decline in surplus is the bottom-line result of sharply higher losses on underwriting and weaker investment gains,” noted Lee. “But, it is important to keep things in perspective. Even though surplus has dropped by $0.8 billion so far this year, surplus remains $12 billion higher than it was at the end of third-quarter 1999. And, the industry’s premium-to-surplus ratio for the 12 months ending March 31, 2000, was 0.86. That suggests competition in insurance markets will remain intense as a result of over capacity,” added Lee.