1999 Financial Results Expose Another Rough Year for Insurers

The results are in for the property/casualty industry’s fourth quarter and year end, and they don’t look any better than 1998. In fact, with the exception of a small acceleration of premium growth, 1999 was worse than 1998 in nearly every other measure-and the pressure is on for a shift in 2000.

By the numbers
Insurers’ net income after taxes plummeted 28 percent to $22.2 billion from $30.8 billion in 1998, according to a recent report by the Insurance Information Institute (I.I.I) of New York. The report is based on data from Insurance Services Office Inc. (ISO) and the National Association of Independent Insurers (NAII).

The figures are consolidated estimates for the entire industry based on the reports of insurers that account for 96 percent of the U.S. property/casualty business. According to the report, net written premium for the past year rose 1.9 percent to $287 billion in 1999, from $281.6 billion in 1998. The underwriting loss for 1999 was 8.3 percent of the $282.9 billion in premiums earned, up from 6 percent of the $277.7 billion in premiums earned during 1998.

“Really, ’99 was a year in which the chickens came home to roost, and those chickens in particular were basically…the result of the very soft commercial market that evolved over the last few years,” said Dr. Bob Hartwig, I.I.I. vice president and chief economist. “The cumulative impact of that was really felt in this year’s bottom line results.”

According to Hartwig, the 39.5 percent surge in net underwriting losses, the 9.7 percent drop in net investment gains, and the 0.9 percent increase in surplus-the smallest gain since 1984-were the three biggest factors in 1999’s financial results. “In addition, there was a lot of house cleaning that obviously took place, and a surprising amount in the fourth quarter,” he said.

Each year in early February, I.I.I holds a “Groundhog” survey of industry analysts to determine the industry’s combined ratio-the measure of losses and underwriting expenses per dollar of premium. The combined ratio of 107.9 in 1999 is higher than the expected consensus estimate of 106.7 that this year’s survey produced. Another surprise would have to be the fourth-quarter combined ratio of 112.2, up from 110.4 in the fourth quarter of 1998.

“Quarterly results don’t jump to that extent unless there has been some deliberate marking up of reserves, taking various charges, those sorts of things, in an attempt to clean house before the next year begins,” Hartwig said.

Another unique factor that Hartwig felt had a direct effect on the fourth-quarter results is the Unicover debacle. “I think there was a lot of owning up to the Unicover problem,” he said. “And so there was several billion [dollars] that insurers had to set aside for that alone, as a lot of companies were finally coming clean on that, seeing no point in carrying that in to this year.”

Playing the stock market
The stock market wreaked havoc on the p/c industry in 1999, as the prices of many insurer stocks were at their lowest levels in years. On a market cap weighted-basis, industry stocks lost 25.7 percent of their value compared to a gain of 21 percent for the Standard & Poor’s (S&P) 500 Index. “It’s anybody’s guess as to what will happen in the stock market,” Hartwig said. “The insurers may have a better year on Wall Street then they had last year, at least in terms of stock price performance.”

According to Chuck Hill, director of research, First Call/Thomson Financial, the property and casualty industry is one where the earnings tend to be volatile due to the catastrophic loss situation which can vary from time to time. “We’ve had a period here where there’s been more [catastrophes] then normal in the last few years, so the earnings have been under pressure at a number of companies,” Hill said.

Catastrophes are “always a wild card,” Hartwig said. “We’ve come to expect them in the $7- to $9-billion range in any given year now, so if they fall in that range, we might see kind of a repeat of 1999’s results in 2000.”

According to Hartwig, the 18 months prior to March were “pretty abysmal” for p/c companies’ stock prices, as a 40 percent gap opened up between the p/c insurers as a group and the S&P 500 Index. However, during March, insurer stocks staged a strong comeback while the Nasdaq fell sharply.

“That’s money coming back into the industry, and despite what you think about insurers, they do make money fairly consistently,” Hartwig said. “Some years they make less than others, but nevertheless they make it, which is more than what you can say for almost any dot-com that’s out there.”

According to Hill, the financial stocks in general have been affected price-wise by the higher interest rates and the threat that they may go higher yet. “Whether that’s right or wrong who knows, but that’s one of the ongoing perceptions and as a result, the financial sector as a whole has underperformed,” Hill said.

In 1999, the industry fell way off pace from 1998’s merger and acquisition (M&A) activity. “Last year, the M&A activity slowed down because of a lot of volatility on Wall Street and a lot of negative news about P&C insurers,” Hartwig said. “It also had to do with the fact that those in the position to acquire insurers are more interested in life insurers and asset management firms.”

The all-mighty dollar
Pricing is the most important issue insurers must confront in 2000, according to Hartwig. He feels that it’s going to be a tough year given the current trends. “We may see a modest acceleration in premium growth to the 2.5 percent range, but it takes a while before the premium growth becomes firmly entrenched and starts to overcome the years of accumulated price inadequacy,” Hartwig said.

Most companies have clearly gotten the message that in order to see any sort of hardening of the market, the “blood bath” of the chronic underpricing in commercial lines can no longer persist. In California, Commissioner Quackenbush recommended an 18.4 percent rate increase in workers’ comp, and most companies followed suit. “They really need to…there is no alternative, and although maybe not to such a great magnitude, that sort of thing is going to take place in other states,” Hartwig said.

As a result, it seems as if moderate rate increases are taking hold in the commercial sector. “The free fall is over,” Hartwig said. “There is a bit of movement to the other side, and even though it’s relatively modest, it’s better than double-digit decline.”

In 1998, the typical personal auto premium fell 2.9 percent nationwide, marking the first decrease in 25 years. And in 1999, that number is somewhere between 4 and 5 percent. “A number of carriers have declared that market share is very, very important to them, and they will essentially buy that business through advertising,” Hartwig said. “And they will spend whatever needs to be spent and keep prices low, at least in the short run, in an effort to increase market share.”

Not reassuring results
A.M. Best Co.’s preliminary analysis for 1999 confirmed that underwriting results deteriorated. While the deterioration in results was felt in all three segments-personal, commercial and reinsurance-the reinsurance sector was the hardest hit by the weak results. Best blamed a rise in global catastrophe losses, adverse loss development on prior accident-year reserves and the ongoing deterioration in industry pricing.

The reinsurers’ combined ratio was 113.8 percent, compared with the combined ratio of 104.4 percent reported by a similar group of reinsurers for 1998, according to the Reinsurance Underwriting Report conducted by the Reinsurance Association of America (RAA). The ratio is attributable to an 81.5 percent loss ratio and 32.3 percent expense ratio.

Lastly, the Financial Services Modernization Act of 1999, signed by President Clinton on Nov. 12, did not lead to an M&A frenzy as some insurers anticipated. Rather than seeing consolidation through mergers and/or acquisitions, Hartwig expects that two strategies will most likely evolve: 1) partnerships between banks and insurers, and 2) insurers forming their own banks. “These could be fee-based partnerships or swapping of mail lists, but I don’t think that most insurers are interested in trying to acquire giant banks nor vice versa at this point,” Hartwig said.

Topics Carriers Profit Loss Reinsurance Market Property Casualty