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 Profitability: Total 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 Profitability: Conclusions
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)
Combined Ratio (Normalized) 103.3
Investment Yield %
Underwriting Gain/Loss* (22.6)
Net Investment Income*
Pretax Operating Income*
Realized Capital Gains *
Unrealized Capital Gains*
Return on Equity (Realized Gains) %
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
P-L Insurance % 10.6%
With Unrealized Cap. Gains 10.3%
Other Industries % 12.5%
Insurance Information Institute
Statutory Accounting 9.6%
GAAP Accounting 8.8%
Other Industries %
Best’s Review

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