Property/casualty insurers' net income up

The U.S. property/casualty industrys 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.

Reflecting the industrys 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, according to Insurance Services Office Inc. and the National Association of Independent Insurers.

The increase in net income and the growth in surplus in first-half 2002 provide important confirmation of the industrys 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 industrys 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 industrys 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, in a news release.

The industrys 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 industrys 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 $600 million 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 industrys 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.