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The property/casualty insurance industry’s net income after taxes fell 7.5 percent last year to $20.2 billion from $21.9 billion the year before, Insurance Services Office Inc. and the National Association of Independent Insurers reported today.
The drop in earnings came as the industry’s net underwriting loss last year ballooned to $32.6 billion, up 41.1 percent from $23.1 billion in 1999. As stock prices declined across the board, the industry suffered $18 billion in unrealized capital losses last year, compared with $1.9 billion in unrealized capital gains in 1999. As a result, the industry’s statutory surplus, or net worth, tumbled 4.5 percent, or $14.9 billion, to $319.4 billion at year-end 2000 from $334.3 billion a year earlier.
The surplus drop was the industry’s first since a 3.1 percent decline in 1984, the bottom of the worst underwriting cycle in the industry’s history. Specifically, the 2000 surplus decline stemmed from the $18 billion in unrealized capital losses, $16.5 billion in dividends to shareholders, and $5.1 billion of miscellaneous charges against surplus, which totaled $39.7 billion. That amount exceeded the $24.8 billion in additions to surplus, namely the $20.2 billion in net income and $4.5 billion in new funds paid in.
Last year’s $9.5-billion increase in net underwriting losses occurred despite an acceleration in premium growth and a sharp drop in catastrophe losses. The industry’s net written premiums grew 5.1 percent last year to $301.6 billion, compared with the prior year’s 1.9-percent growth to $286.9 billion. ISO’s Property Claim Services unit reported that catastrophe losses fell 45.2 percent last year to $4.6 billion from the prior year’s $8.3 billion.
“Premium growth provided at least one bright spot in the industry’s otherwise bleak numbers,” said John J. Kollar, ISO’s vice president – consulting and research. “Comparing quarterly premiums to year-ago levels, growth accelerated steadily from 2.1 percent in fourth-quarter 1999 to 6.4 percent in fourth-quarter 2000. That suggests insurance markets have at least stopped softening. If the industry can sustain premium increases, it would bode well for future results.”
ISO’s and the NAII’s industry figures are consolidated estimates, based on the reports of insurers that account for 96 percent of the U.S. property/casualty insurance business. The deterioration in the industry’s net loss on underwriting resulted primarily from an 8.7-percent increase in overall loss and loss-adjustment expenses to $241.6 billion in 2000 from $222.3 billion in 1999. Other underwriting expenses rose 4.4 percent to $83.8 billion last year from $80.3 billion in 1999. Premiums returned to policyholders as dividends increased 17.6 percent to $3.9 billion in 2000 from $3.3 billion in 1999.
The combined ratio – a measure of losses and underwriting expenses per dollar of premium – deteriorated to 110.5 percent in 2000, 2.8 percentage points worse than the industry’s 107.8 percent combined ratio for 1999 and 4.9 percentage points worse than the 105.6 percent combined ratio for 1998.
“Bad as they were, underwriting results benefited from the decline in catastrophe losses,” said Diana Lee, the NAII’s vice president – research services. “If catastrophe losses last year had stayed the same as they were in 1999 instead of declining, the combined ratio for 2000 would have been 111.8 percent – 1.3 percentage points worse than the actual combined ratio for the year.”
Net losses on underwriting in 2000 amounted to 11 percent of the $296.8 billion in premiums earned during the year, up from 8.2 percent of the $282.8 billion in premiums earned during 1999. “The growth in loss and loss-adjustment expenses overwhelmed premium growth,” said Kollar. “Non-catastrophe loss and loss-adjustment expenses last year climbed 10.8 percent to $237 billion from $214 billion the year before. It’s a simple truth: If losses keep growing faster than premiums, underwriting results are going to keep on deteriorating.”
The effect of larger underwriting losses on net income after taxes was partially offset by an increase in investment income, higher realized capital gains, an increase in other income, and slightly lower federal income taxes. Net investment income (primarily dividends earned from stocks and interest on bonds) increased $2 billion to $40.8 billion in 2000 from $38.9 billion in 1999. Realized capital gains rose $3.9 billion to $16.9 billion last year from $13 billion the year before.
Miscellaneous other income totaled $0.5 billion in 2000, compared with a $1.4-billion loss in 1999. Federal income taxes declined $0.1 billion to $5.5 billion in 2000 from $5.6 billion in 1999. “Last year’s 5.1-percent growth in investment income was welcome after a 2.7-percent decline in 1999 and a 3.8-percent decline in 1998,” noted Lee. “The Federal Reserve cut its key benchmark interest rate twice in January by a total of 100 basis points and another 50 basis points in March, and many analysts expect further cuts as the Fed fights to ward off recession. With more than half the industry’s investment income coming from interest on bonds, declines in interest rates could take the steam out of future growth in investment income,” added Lee.
The industry’s operating income – the sum of gains or losses on underwriting, net investment income, and miscellaneous other income – fell $5.6 billion, or 39 percent, to $8.8 billion in 2000 from $14.4 billion the year before. The industry’s pre-tax net investment gain – the sum of net investment income and realized capital gains – rose $5.9 billion to $57.8 billion in 2000 from $51.9 billion in 1999. Combining realized capital gains and unrealized capital losses, the industry suffered $1.1 billion in overall capital losses on investments last year, in contrast to $14.9 billion in overall capital gains in 1999.
“Insurers’ ability to use investment gains to paper over losses on underwriting nearly evaporated last year,” observed Kollar. “The difference between total investment gains – the sum of investment income and overall capital gains (losses) – and underwriting losses dropped to $7.2 billion in 2000, down from $30.7 billion in 1999 and a peak of $75.5 billion in 1997,” added Kollar. “Last year’s sharp swing to overall capital losses from overall capital gains the year before isn’t surprising, given what’s happened in the financial markets,” said Lee. “The Standard & Poor’s (S&P) 500 dropped 10.1 percent last year after rising 19.5 percent the year before. Other major market indicators also declined. And the S&P 500 fell another 12.1 percent in this year’s first quarter. The open questions are: Where will the markets go from here, and how will that affect future capital gains and surplus? Right now, it’s hard to be optimistic.”
Fourth-Quarter Results
The industry’s fourth-quarter 2000 net income after taxes was $3.8 billion, down from $4.5 billion in fourth-quarter 1999 and $6.4 billion in third-quarter 2000. Net income for fourth-quarter 2000 consisted primarily of $1 billion in pre-tax operating income and $3.5 billion in realized capital gains. The industry incurred $0.6 billion in federal income taxes in the fourth quarter of 2000, compared with $0.3 billion incurred in fourth-quarter 1999.
The industry’s fourth-quarter 2000 pre-tax operating income of $1 billion was down 54.7 percent from $2.1 billion in the comparable period a year earlier. Fourth-quarter 2000 operating income consisted of $10.7 billion in underwriting losses, $11.7 billion in net investment income, and $48 million in miscellaneous losses on other operations. The fourth-quarter pre-tax underwriting loss of $10.7 billion was 35.7 percent more than the $7.9 billion underwriting loss in the fourth quarter of 1999.
Contributing to the increase in underwriting losses, catastrophe losses rose to $0.8 billion in the fourth quarter of 2000 from $0.3 billion in the fourth quarter of 1999, ISO’s PCS unit reported. The fourth-quarter 2000 underwriting loss represents 13.8 percent of $77.7 billion in earned premiums, up from 11 percent of $71.9 billion in earned premiums during the fourth quarter of the prior year.
The underwriting loss in the fourth quarter of 2000 included $1.5 billion of premiums returned to policyholders as dividends, down 0.2 percent from fourth-quarter 1999. Net investment income for the fourth quarter of 2000 was $11.7 billion, up from $10.3 billion in the year-earlier period. Realized capital gains for fourth-quarter 2000 were $3.5 billion, compared with $2.6 billion in fourth-quarter 1999.
The industry’s pre-tax net investment gain, which combines net investment income and realized capital gains, was $15.2 billion in 2000’s fourth quarter, compared with $12.9 billion in 1999’s fourth quarter. Written premiums totaled $73.4 billion for fourth-quarter 2000, up from $69 billion for fourth-quarter 1999 and $67.5 billion for fourth-quarter 1998.