P-C Industry Bottom Line Profits Soar

Net written premium growth remained healthy from a historical perspective, increasing 9.8 percent to $405.9 billion. However, net written premium growth slowed considerably from the 14.3 percent mark set in 2002.

Net earned premiums rose $39.6 billion–11.4 percent–to $388.1 billion last year.

Insurer investment income from stock dividends and bond interest was reported to have risen 3.9 percent to $38.7 billion last year, while realized capital gains on investments increased to $6.9 billion, up from capital losses of $1.2 billion in 2002.

Industry surplus–which stood at $347 billion at year-end 2003, compared with $285.4 billion at year-end 2002–benefited from net income increases and $25.2 billion in unrealized capital gains on insurer investments, ISO and PCI said. The $61.6 billion increase in surplus in 2003 erased three years of declines, the groups noted.

The reporting groups attributed much of the improvement in insurers' net income after taxes on a "steep decline" in net losses on underwriting–down 85 percent to $4.6 billion in 2003 from $30.8 billion in 2002. The 2003 net underwriting loss amounted to 1.2 percent of the $388.1 billion in premiums earned during the year–down substantially from 8.8 percent of the $348.5 billion in premiums earned during 2002.

John Kollar, vice president for consulting and research at Jersey City, N.J.-based ISO, said good underwriting allowed improvement in the combined ratio despite catastrophe losses, which more than doubled to $12.9 billion from $5.9 billion in 2002.

But even as they reported the good news, executives with the two organizations warned that insurers probably cannot count on rising premium prices and higher capital gains to bolster their bottom lines.

Indeed, ISO "MarketWatch" data shows that commercial premium increases peaked in July 2002 and "have been losing momentum ever since," according to Mr. Kollar. "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."

He added that given the circumstances and the industry's cyclical history, "one has to wonder how soon price increases will become price decreases."

Meanwhile, whether insurers can continue posting investment results like those in 2003 "is an open question," noted Roger Kenney, assistant vice president for research for the Des Plaines, Ill.-based PCI.

The industry's pre-tax net investment gain–the sum of net investment income and realized capital gains–increased 26.6 percent to $45.6 billion last year from $36 billion a year earlier. Combining realized and unrealized gains, insurers saw $32.1 billion in overall capital gains last year, a big change from the $22 billion in overall capital losses the year before.

However, last year's gains weren't enough to offset three years of stock declines, according to Mr. Kenney, who said the outlook for continued growth is uncertain at best. "Insurers certainly can't count on capital gains in 2004 being anywhere near as large as?in 2003," he said. "Stock markets have lost their momentum."

Overall loss and loss-adjustment expenses grew just 2.2 percent to $289.8 billion in 2003 from $283.6 billion a year earlier. Non-catastrophe loss and loss-adjustment expenses dipped 0.3 percent to $276.9 billion last year from $277.8 billion in 2002.

Underwriting expenses connected with acquisitions, underwriting, pricing and servicing insurance policies, as well as premium taxes increased 7.8 percent to $101.1 billion in 2003 from $93.8 billion the year before.

Premiums returned to policyholders as dividends declined 3.7 percent in 2003 to $1.9 billion.

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.

Meanwhile, improved insurer profitability benefited Uncle Sam, as p-c insurer federal income taxes increased to $10.8 billion in 2003, up from $1.3 billion the year before.

ISO and PCI figures are consolidated estimates for all private p-c insurers based on the reports of insurers that account for 96 percent of all U.S. p-c business.