PC INDUSTRY NET INCOME RISES FROM $5 BILLION TO $21.1 BILLION.

The nation's property/casualty industry's net income after taxes rose from $5 billion during the first nine months of 2002 to $21.1 billion for the same time period in 2003, the Insurance Services Office and the National Association of Independent Insurers reported Dec. 22.

The industry's surplus or statutory net worth on Sept. 30 had surged to $319.9 billion, an increase of 12.1 per cent from the $285.4 billion reported at the end of 2002.

John J. Kollar, ISO vice president for consulting and research, and Don Griffin, NAII assistant vice president for business and personal lines, said catastrophe losses more than doubled in the first nine months of 2003, increasing to $10.1 billion from $4.1 billion for the same period in 2002.

Despite these higher catastrophe losses, they said, pre-tax operating income - the sum of gains or losses on underwriting, net investment income and other miscellaneous income - had climbed 159.5 percent, from $8.5 billion for the first nine months of 2002 to $22.1 billion for the first nine months of 2003.

They said underwriting results had improved as premium growth outpaced growth in loss and loss-adjustment expenses, other underwriting expenses and dividends to policyholders.

They said net losses on underwriting decreased 68.8 percent in the first nine months of 2003, down to $5.7 billion, from $18.2 billion for the first nine months of 2002.

They said earned premiums rose 11.6 per cent, up to $288.7 billion during the first nine months of 2003, but noted earned premium growth for the first nine months of 2002 had been only slightly lower, at 11.4 percent.

They said net written premiums climbed $28.3 billion to $308.6 billion during the first nine months of 2003, but noted premium growth versus year-ago levels went from 13.8 per cent for the first nine months of 2002 to 10.1 per cent during the first nine months of 2003.

Even so, they said, the 10.1-per cent increase in written premiums in the first nine months of 2003 is the second largest increase in premiums through any nine-month period since 1987, when premiums rose 10.9 per cent.

"The significant improvement in underwriting and overall results through nine-months 2003 is very welcome, and we 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," Griffin said.

"To insurers' credit, much of the progress to date reflects increased attention to the fundamentals of our business - solid underwriting, cost-based pricing and careful claim settlement.

"Now, the 64-thousand-dollar question is how long will insurers maintain their focus on the fundamentals? Each improvement in insurers' results makes it that much harder to resist the temptation to ignore the fundamentals and go for market share."

Kollar pointed out written premium growth had climbed fairly steadily from 1.8 per cent in the first nine months of 1999 to a peak of 13.8 per cent in the first nine months of 2002, but had slowed to 10.1 per cent in the first nine months of 2003.

"All else being equal, insurers will have an increasingly difficult time maintaining growth in net income as rate increases wane," he said.

"If insurers want to regain profitability like the 15.1 per cent return on average surplus they enjoyed in 1986, they need to continue focusing on the core fundamentals of the insurance business.

"To get a 15.1 per cent rate of return with today's investment results, financial leverage and tax rates, insurers would need to get the combined ratio down to 94.6 percent - 5.6 percentage points better than the actual combined ratio through nine-months 2003 and 13.4 percentage points better than the 108.1 per cent combined ratio for 1986, when the yield on 10-year Treasury notes averaged 7.7 percent."

He said the average yield on 10-year Treasury notes dropped last June to a 45-year low of 3.33 percent, but had risen to an average of 4.45 per cent in August and had been holding steady, averaging 4.30 in November.

Griffin said he expected insurers to post some capital gains when reporting fourth-quarter results, adding, "The factors that bode well for investment gains include recent increases in interest rates and the strength in equity markets thus far in the fourth quarter."