Insurance Profitability

1
Insurance Profitability

• Issues in Measuring Insurance Profitability
• Underwriting and Investments
• Total Rate of Return
• Results for Property-Liability Insurers
• Comparison with Other Industries

2
Issues in Measuring Insurance Profitability
Underwriting and Investments

• Calendar Year or Accident Year
• Underwriting Profit/Loss
• Combined Ratio
• Impact of Catastrophes
• Mass Tort Liabilities Asbestos and
  Environmental
• New Business Growth Rate
• Investment Income
• Net Investment Income
• Realized Capital Gains
• Unrealized Capital Gains
• Operating Ratios

3
Issues in Measuring Insurance ProfitabilityTotal
Rate of Return

• Calculating Total Return
• Calculating Return on Equity
• Statutory Surplus
• Adjustments to Surplus
• Equity in the Unearned Premium Reserve
• Discounted Loss Reserves
• Taxation on Unrealized Capital Gains

4
Issues in Measuring Insurance ProfitabilityConcl
usions

• Many ways to calculate insurance profits
• Insurers are different from other corporations

5
Results for Property-Liability Insurers

• Estimated Results for Calendar Year 1999
• Combined Ratio (Reported) 107.5
• Combined Ratio (Normalized) 103.3
• Investment Yield 4.9
• Underwriting Gain/Loss (22.6)
• Net Investment Income 39.0
• Pretax Operating Income 15.5
• Realized Capital Gains 15.0
• Unrealized Capital Gains 1.0
• Return on Equity (Realized Gains) 7.0
• Return on Equity (All Capital Gains) 7.3
• In billions

6
Conclusions from Recent Results

• Underwriting Profit/Loss is not meaningful by
  itself
• Catastrophes and losses on past policies affect
  the results
• Investment Income must be considered
• Capital Gains are variable
• Need to look at trends

7
Comparison with Other Industries

• ISO Studies
• Average Return on Net Worth 1970-1986
  1978-1997
• P-L Insurance 10.1 10.6
• With Unrealized Cap. Gains 10.3
• Other Industries 11.8 12.5
• Insurance Information Institute 1996
• Statutory Accounting 9.6
• GAAP Accounting 8.8
• Other Industries 11.5-18.5
• Bests Review 1994-1999

8
Conclusions

• It is difficult to compare insurance
  profitability with other industries
• Most studies find insurance less profitable and
  more risky than other industries
• Industry continues to attract new entry