$14.5B First Half Profit for P/C Industry

The U.S. property/casualty industry’s net income after taxes rose to $14.5 billion in first-half 2003 from $4.4 billion in first-half 2002, as both underwriting and investment results improved, according to Insurance Services Office Inc. (ISO) and the National Association of Independent Insurers (NAII).

Reflecting the industry’s income and unrealized capital gains on investments, its surplus, or statutory net worth, increased 9.9 percent to $312.5 billion at June 30 from $284.3 billion at year-end 2002.

The increase in net income and the growth in surplus in first-half 2002 provide important confirmation of the industry’s continuing recovery from the soft markets of the 1990s. Yet, even with the 231.6 percent increase in net income in first-half 2003, the industry’s income during the period was 2.5 percent below its income in first-half 1999 and 22.5 percent below its income in first-half 1997. Surplus as of June 30 was 1.5 percent below surplus at year-end 2000 and 7.9 percent below its peak of $339.3 billion at June 30, 1999.

“Reflecting the sharp increase in income in first-half 2003, insurers’ profitability improved significantly, with the industry’s annualized rate of return on average surplus rising to 9.7 percent for first-half 2003 from 3.1 percent for first-half 2002,” said John J. Kollar, ISO vice president for consulting and research. “The industry’s annualized rate of return through six months has bounced back from a cyclical low of 1.8 percent for first-half 2001 to its highest level since the 9.8 percent for first-half 1998. While the progress rebuilding profitability is encouraging, only time will tell whether insurers ever regain profitability like the 15 percent annualized rate of return for first-half 1987.”

Despite higher catastrophe losses, pre-tax operating income — the sum of gains or losses on underwriting, net investment income, and other miscellaneous income — climbed 165.9 percent to $15.6 billion for six-months 2003 from $5.9 billion for six-months 2002. Spurring improvement in the industry’s results, net losses on underwriting decreased 77.5 percent in first-half 2003 to $2.7 billion from $12 billion in first-half 2002. Net investment income — primarily dividends from stocks and interest on bonds — grew 2.1 percent to $18.3 billion for six-months 2003 from $17.9 billion for six-months 2002. Other miscellaneous income grew to $74 million in the first half of this year, up from $26 million in first-half 2002.

The figures are consolidated estimates for all private property/casualty insurers based on the reports of insurers that account for 96 percent of all business written by private U.S. property/casualty insurers.

Also contributing to the increase in net income, U.S. property/casualty insurers realized $4.5 billion in capital gains on investments in first-half 2003 — a sharp contrast to the $0.6 billion in capital losses realized in first-half 2002. Net investment gains — the sum of net investment income and realized capital gains (losses) — grew 32.1 percent to $22.8 billion for six-months 2003 from $17.3 billion for six-months 2002.

Partially offsetting the increase in pre-tax operating income and the positive swing in realized capital gains, the industry’s federal income taxes climbed to $5.7 billion for six-months 2003 from $889 million for six-months 2002.

Underwriting results improved as premium growth outpaced growth in loss and loss-adjustment expenses, other underwriting expenses, and dividends to policyholders. Net written premiums climbed $20.1 billion to $202.8 billion in first-half 2003. Though premium growth slowed to 11 percent from the 12.2 percent in first-half 2002, it still compares favorably with the 9.9 percent increase in first-half 2001. The 11 percent increase in written premiums in the first half of 2003 is the second largest first-half increase in premiums since 1987, when premiums rose 13 percent.

Earned premiums climbed 12.3 percent in first-half 2003 to $190 billion, with earned premium growth for six-months 2003 accelerating from the 10.2 percent increase for six-months 2002.

“The dramatic improvement in underwriting and overall results through six-months 2003 is certainly welcome, and we have reason to believe underwriting results will improve further as rate increases in insurance markets continue working their way into earned premiums and down to insurers’ bottom line,” said Don Griffin, NAII assistant vice president for business and personal lines. “But there are at least three wild cards that add uncertainty to the outlook — insurers’ need to strengthen loss reserves, the ever-present possibility of extreme events such as natural catastrophes or terrorist attacks, and future developments in insurance markets.”

“With respect to developments in insurance markets, written premium growth climbed fairly steadily from 1 percent in first-half 1999 to a peak of 16.3 percent for the six months ending December 2002. Since then, premium growth has slowed to 11 percent for the six months ending June 2003,” Kollar said. “What’s more, the excess of premium growth over GDP growth narrowed from 9.2 percentage points in first-half 2002 to 7.2 percentage points in first-half 2003. All this suggests that we are in the mature phase of a hard market, with rate increases tapering downward. With the industry’s annualized rate of return nearing 10 percent, the $64,000 question is how long insurers will maintain underwriting discipline and resist the temptation to sacrifice pricing in the quest for market share.”

Catastrophe losses nearly doubled in first-half 2003, increasing to $6.5 billion from $3.4 billion in first-half 2002, according to ISO’s Property Claim Services (PCS) unit. The $6.5 billion in catastrophe losses compares with an average of $5.4 billion in first-half catastrophe losses during the ten years from 1993 to 2002.

Despite the increase in catastrophe losses, overall loss and loss-adjustment expenses rose just 5.4 percent to $142.1 billion in first-half 2003 from $134.9 billion in first-half 2002, as non-catastrophe loss and loss-adjustment expenses rose 3.2 percent to $135.7 billion in first-half 2003 from $131.5 billion a year earlier.

Other underwriting expenses — primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — rose 9.4 percent to $50 billion in the first half of this year from $45.7 billion in the first half of last year.

Dividends to policyholders increased 3.5 percent to $640 million in first-half 2003 from $618 million in first-half 2002.

The underwriting loss in first-half 2003 amounts to 1.4 percent of the $190 billion in premiums earned during the period, down from 7.1 percent of the $169.1 billion in premiums earned during the comparable period last year. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 99.8 percent in the first half of this year, 5.3 percentage points better than the 105.1 percent a year ago.

“The 99.8 percent combined ratio for the first half of 2003 is the best underwriting result for any six-month period since 1986, when our quarterly records begin. Based on full-year data, the industry’s combined ratio last fell below 100 percent in 1978, when it was 97.4 percent,” Griffin said. “First-half results would have been even better if not for the increase in catastrophe losses. While the reported combined ratio for first-half 2003 improved 5.3 percentage points versus year-ago, it would have improved by 6.9 percentage points had catastrophe losses stayed the same.”

The $28.1 billion increase in the industry’s consolidated surplus in first-half 2003 contrasts with a $7.6 billon decline in first-half 2002. The increase in surplus in first-half 2003 consisted of $14.5 billion in net income after taxes, $11.9 billion in unrealized capital gains on investments, $3.3 billion in new funds paid in, and $2.4 billion in miscellaneous surplus changes, less $4 billion in dividends to stockholders.

The $11.9 billion in unrealized capital gains in first-half 2003 contrasts with $8.3 billion in unrealized capital losses in first half-2002.

The $3.3 billion in new funds paid in during first-half 2003 is more than twice the $1.6 billion in new funds paid in during first-half 2002.

The $2.4 billion in miscellaneous additions to surplus through six-months 2003 contrast with $1.8 billion in miscellaneous charges against surplus through first-half 2002.

The $4 billion in dividends to stockholders in six-months 2003 constitutes a 14.8 percent increase from the $3.4 billion in dividends to stockholders in six-months 2002.

Combining realized and unrealized capital gains, insurers enjoyed $16.5 billion in overall capital gains on investments in first-half 2003 — a $25.4 billion positive swing from $8.9 billion in overall capital losses in first-half 2002.

“The swing from overall capital losses in first-half 2002 to overall capital gains in first-half 2003 is just a reflection of the recovery in equity markets — a welcome development, but not something insurers can count on going forward,” Kollar said. “In the first half of 2003, the S&P 500 rose 10.8 percent — a sharp swing from the 13.8 percent decline in the S&P 500 in the first half of 2002. With the S&P 500 having risen another 2.3 percent from June 30 to September 26, there is a good chance insurers will also post some overall capital gains for third-quarter 2003. Beyond that, any projection for capital gains is only as good as the underlying forecast for stock prices.”

“Still, there are some indications that insurers can look forward to continuing growth in investment income,” Griffin noted. “The 2.1 percent increase in investment income in first-half 2003 is the net result of an 8.3 percent increase in insurers’ average holdings of cash and invested assets and a 5.7 percent decline in the yield on cash and invested assets. Reasons that we can anticipate growth in investment income for some time to come include the likelihood that holdings of cash and invested assets will continue to rise as a consequence of continuing premium growth. Reasons for expecting further growth in investment income also include trends in interest rates. The average yield on 10-year Treasury notes fell to 3.33 percent in June — the lowest monthly average since the 3.20 percent for July 1958. But the average yield on 10-year Treasuries rose to 4.45 percent this past August.”