P/C Income, Surplus Rise Sharply in 2003

The property/casualty insurance industry’s net income after taxes rose to $29.9 billion in 2003—nearly 10 times the industry’s $3 billion in net income in 2002.

Benefiting from both the $29.9 billion in net income and $25.2 billion in unrealized capital gains on insurers’ investments, the industry’s statutory surplus increased 21.6 percent to $347 billion at year-end 2003 from $285.4 billion at year-end 2002, Insurance Services Office Inc. (ISO) and the Property Casualty Insurers Association of America (PCI, formerly the National Association of Independent Insurers)
reported.

A steep decline in net losses on underwriting drove much of the improvement in insurers’ net income after taxes, with net losses on underwriting declining 85 percent to $4.6 billion in 2003 from $30.8 billion in 2002. In addition, insurers’ investment income (primarily dividends earned on stocks and interest on bonds) rose 3.9 percent to $38.7 billion last year from $37.2 billion in 2002, and realized capital gains on investments jumped to $6.9 billion—an $8.1 billion positive swing from insurers’ $1.2 billion in realized capital losses on investments in 2002. Partially offsetting these positive developments, insurers’ federal income taxes rose $9.4 billion to $10.8 billion in 2003 from $1.3 billion the year before.

The ISO and PCI industry figures are consolidated estimates for all private P/C insurers based on the reports of insurers that account for 96 percent of all business written by private U.S. P/C insurers.

“The $61.6 billion increase in surplus in 2003 follows declines in each of the previous three years. The declines in surplus from 2000 to 2002 totaled $49 billion,” stated Roger Kenney, PCI’s assistant vice president for research. “The increase in surplus last year more than erased those declines, with surplus at year-end 2003 being 3.8 percent above the $334.3 billion in surplus at year-end 1999.”

The $25.2 billion in unrealized capital gains on investments last year contrast sharply with the $20.8 billion in unrealized capital losses in 2002.

The net loss on underwriting in 2003 amounted to just 1.2 percent of the $388.1 billion in premiums earned during the year, down from 8.8 percent of the $348.5 billion in premiums earned during 2002. The combined ratio—a key measure of losses and underwriting expenses per dollar of premium—improved to 100.1 percent last year from 107.3 percent in 2002.

“Looking more closely at the numbers, we see fundamental underwriting results improved to an even greater degree,” said John Kollar, ISO’s vice president for consulting and research. “The combined ratio improved to 100.1 percent last year even though catastrophe losses more than doubled. Had catastrophe losses remained the same as they were in 2002, the combined ratio would have improved all the way to 98.2 percent.”

According to ISO’s Property Claim Services (PCS) unit, catastrophe losses rose to $12.9 billion in 2003 from $5.9 billion in 2002.

Net written premiums increased $36.2 billion, or 9.8 percent, to $405.9 billion in 2003 from $369.7 billon in 2002. Growth in net written premiums slowed from 14.3 percent in 2002. Net earned premiums rose $39.6 billion, or 11.4 percent, to $388.1 billion in 2003 from 2002’s $348.5 billion.

“Though premium growth is slowing, it is still strong. Of course, one key question at this point is just how long premium growth will remain strong,” Kollar said. “ISO MarketWatch® data indicate the commercial lines pricing cycle turned positive in mid-1999. But ISO MarketWatch data also show that increases in commercial premiums peaked in July 2002 and have been losing momentum ever since. At some point, growth in surplus and improvement in profitability will reinvigorate competition for market share, putting pressure on the price of insurance and undermining premium growth.”

The industry’s operating income—the sum of gains or losses on underwriting, net investment income and miscellaneous other income—rose to $33.7 billion in 2003 from $5.6 billion the year before.

Combining realized and unrealized gains, insurers experienced $32.1 billion in overall capital gains last year, up sharply from the $22 billion in overall capital losses the year before.

“Clearly, insurers benefited from the recovery in stock markets last year as the S&P 500 rose 26.4 percent,” Kenney said. “But insurers’ $32.1 billion in overall capital gains last year weren’t enough to offset the damage done by three consecutive years of double-digit declines in the S&P 500.”

He added that “whether insurers continue posting investment results like those in 2003 is an open question.”

The industry raised $11.5 billion in new capital last year, down 38.7 percent from the record $18.8 billion raised in 2002 as insurers sought to replenish surplus in the wake of the terrorist attacks on Sept. 11, 2001.