Q1 Results: P/C Industry Premiums Up; Net Income, Surplus Down

The U.S. property/casualty industry’s net income after taxes dropped 5.4 percent to $5.6 billion in first-quarter 2001 from $5.9 billion in first-quarter 2000, according to Insurance Services Office Inc. (ISO) and the National Association of Independent Insurers (NAII). ISO and the NAII also report that the industry’s consolidated surplus—its assets minus its liabilities—fell 4.7 percent to $303.7 billion at March 31 from $318.7 billion at Dec. 31, 2000.

Contributing to the decline in net income was a 2.4-percent increase in the industry’s net loss on underwriting to $6.1 billion in first-quarter 2001 from $6 billion in first-quarter 2000. In addition, the industry’s net gain on investments declined 3.8 percent to $12.7 billion in first-quarter 2001 from $13.2 billion in first-quarter 2000.

“The industry’s net loss on underwriting grew despite acceleration of written premium growth from year-ago levels to 10.4 percent in first-quarter 2001. That’s up from 5.6-percent growth in fourth-quarter 2000 and 3.1 percent in first-quarter 2000,” said John J. Kollar, ISO vice president for consulting and research. “The last time quarterly premiums grew more than 10 percent year-over-year was the second quarter of 1987, when premiums rose 12.5 percent. The acceleration in written premium growth indicates that anecdotal reports of rate increases are finally being confirmed by actual data, but it will take time for stronger written premiums to fully translate into stronger earned premiums and improved underwriting profitability.”

Industry net written premiums for first-quarter 2001 were $81.9 billion, compared with $74.1 billion in the same period a year ago.

“One sign that the acceleration in premium growth was driven by firming in insurance markets is that premium growth exceeded growth in the economy,” said Diana Lee, NAII vice president for research services. “The first quarter’s 10.4-percent increase in premiums from year-ago levels is more than double the 4.9-percent increase in the nation’s gross domestic product. The last time premiums grew more rapidly than GDP was the fourth quarter of 1993, when premiums rose 7.9 percent from year-ago levels and GDP rose 5 percent.”

The underwriting loss in first-quarter 2001 amounts to 8 percent of the $76.7 billion in premiums earned during the quarter, down from 8.4 percent of the $71 billion in premiums earned during first-quarter 2000. 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 grew in first-quarter 2001 primarily because of an increase in loss and loss-adjustment expenses. The industry incurred $60.8 billion in loss and loss-adjustment expenses in first-quarter 2001, up $4.8 billion, or 8.5 percent, from $56.1 billion in first-quarter 2000. The 8.5-percent increase in first-quarter 2001 compares with an 11.6-percent increase in fourth-quarter 2000 and an 8.8-percent increase in first-quarter 2000.

Overall loss and loss-adjustment expenses increased in first-quarter 2001 even though catastrophe losses dipped. According to ISO’s Property Claim Services unit, first-quarter 2001 catastrophe losses totaled $705 million, down from $2 billion in first-quarter 2000. Other loss and loss-adjustment expenses totaled $60.1 billion in first-quarter 2001, up 11.1 percent from $54.1 billion in first-quarter 2000.

The increase in net losses on underwriting in first-quarter 2001 also reflects an increase in other underwriting expenses. In this year’s first quarter, such expenses rose $1.2 billion, or 5.9 percent, to $21.6 billion, from $20.4 billion in first-quarter 2000. The 5.9-percent increase in other underwriting expenses in the first quarter of this year compares with a 5.1-percent increase in the fourth quarter of 2000 and a 4-percent increase in the first quarter of 2000.

The combined ratio—a measure of losses and other underwriting expenses per dollar of premium—improved to 106.2 percent in first-quarter 2001, 1 percentage point better than the 107.2 percent combined ratio for the corresponding quarter of 2000.

“Some may point to the improvement in the combined ratio as a sign that the industry is finally benefiting from firming in insurance markets, but we aren’t there yet,” Kollar observed. “If catastrophe losses had stayed at first-quarter 2000 levels instead of declining to the lowest first-quarter amount in 10 years, the combined ratio would have risen by 0.7 percentage points to 107.9 percent instead of declining a percentage point to 106.2 percent.”

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 $0.5 billion, or 3.8 percent, to $12.7 billion in first-quarter 2001 from $13.2 billion in first-quarter 2000. Realized capital gains dropped $0.2 billion, or 7.1 percent, to $3.2 billion in first-quarter 2001 from $3.4 billion in first-quarter 2000. Net investment income dropped $0.3 billion, or 2.6 percent, to $9.6 billion from $9.8 billion.

“The 2.6-percent decline in insurers’ investment income is the net result of two factors—lower yields on investments and a decline in the size of insurers’ investment portfolios,” Lee noted. “The Federal Reserve Board cut its benchmark overnight bank lending rate three times in the first quarter, with the cuts totaling 150 basis points. And insurers’ holdings of cash and invested assets declined 2.7 percent to $779.3 billion in first-quarter 2001 from $801.1 billion a year earlier.”

Insurers sustained $17.3 billion in total capital losses in first-quarter 2001, compared with $0.6 billion in total capital gains in first-quarter 2000. The swing to total capital losses in first-quarter 2001 from total capital gains in first-quarter 2000 resulted from the drop in realized capital gains and a sharp increase in unrealized capital losses. Unrealized capital losses soared to $20.5 billion in first-quarter 2001 from $2.8 billion in the same period a year ago.

“The total capital losses in first-quarter 2001 reflect weakness in financial markets during the quarter,” Kollar said. “During the first three months of this year, the Standard & Poor’s 500 fell 12.1 percent, and the NASDAQ composite plunged 25.5 percent. In the first quarter of 2000, when insurers enjoyed $0.6 billion in total capital gains, the Standard & Poor’s 500 rose 2 percent, and the NASDAQ composite climbed 12.4 percent.”

The industry’s pre-tax operating income—the sum of its gain or loss on underwriting, its net investment income, and other miscellaneous income—fell $0.1 billion to $4 billion in first-quarter 2001 from $4.1 billion in first-quarter 2000. The effect of larger losses on underwriting and lower investment income on operating income was partially offset by a $0.3-billion increase in miscellaneous other income to $0.6 billion in first-quarter 2001 from $0.3 billion the year before.

The industry’s consolidated surplus declined by $15 billion during first-quarter 2001. Charges against surplus in first-quarter 2001 included $20.5 billion in unrealized capital losses and $3.5 billion in dividends to shareholders. These charges were partially offset by additions to surplus, which included $5.6 billion in net income after taxes, $0.7 billion in new funds, and $2.7 billion in other miscellaneous changes.

“Understanding exactly what drove the $2.7 billion in miscellaneous additions to surplus this quarter is more difficult than usual,” Lee observed. “The National Association of Insurance Commissioners’ codification of statutory accounting principles led to significant changes in statutory accounting effective Jan. 1 of this year. The $2.7 billion is net effect on surplus of those accounting changes and other items. Determining the exact effect of codification will require further analysis.”

Source: Insurance Services Office, National Association of Independent Insurers and the Insurance Information Institute.