With two catastrophes producing insured losses over $1 billion,and seven more contributing to a $4.4 billion total, second-quarter2001 was the second-worst second quarter in a decade, according tothe Property Claims Services unit of Jersey City, N.J.-basedInsurance Services Office, Inc.

But when individual company results were officially announced forthe quarter, the expected refrain--"Except for catastrophe losses,our results were profitable"--was replaced by a variety of unusualstatements.

In addition to the effects of Tropical Storm Allison, executives atAllstate and Chubb said adverse trends in the homeowners linelowered their numbers when they announced their second-quarterearnings for 2001.

Except for their reinsurance business, results were solid, saidRamani Ayer, chairman and chief executive officer of TheHartford.

At The St. Paul, it was healthcare liability claims that intrudedon otherwise glowing results, according to Chairman and CEO DouglasLeatherdale.

American Financial Group is still struggling to get ahead ofpersonal auto loss costs by increasing rates, according to CarlLindner III, co-president. The company is also planning to reviewits asbestos and environmental exposure, the Cincinnati-basedcompany said.

At CNA, there were reserve charges for asbestos claims,environmental claims and other mass tort claims totaling some $800million after taxes. CNA also had reserve charges for constructiondefect losses, reinsurance, nursing home chains and a host of otherlines. All these non-A&E charges, totaling $900 million aftertaxes, related to policies written in recent prior years, CNAsaid.

Even business that didnt need the fix of extra loss reservesproduced charges for CNA that reduced second-quarter earningsfurther. For certain retrospectively-rated accounts, the insurerexplained, lower-than-expected losses will mean that anticipatedadditional premiums wont materialize--creating the need for anadditional $400 million charge.

"Youre going to add four points to the industry combined ratio forthe quarter," Jay Cohen, an insurance analyst and first vicepresident for Merrill Lynch in New York, advised CNA executivesduring a CNA earnings conference. His observation foreshadows thepossibility that an "except for CNA" footnote will show up onindustry aggregate results charts when such numbers arereleased.

Among the 26 insurers tracked by National Underwriter forthe second quarter, most showed better combined ratios insecond-quarter 2001 than in 2000. But for the nine of 10 insurerswhose deteriorating underwriting results pushed operating earningsdownward, earnings didnt simply fall--they plummeted.

Among them were Northbrook, Ill.-based Allstate, which reportednearly a 50 percent decline in operating earnings; Seattle-basedSAFECO, where earnings fell more than 400 percent; and CNA, with apercentage drop in earnings consisting of four digits--1,447percent.

"We, as analysts, were disappointed by the operating issues thatemerged in the second quarter"--by the number of companies thatannounced them and by the fact the announcements "came this lateinto the hardening market," said Michael Lewis, head of insuranceresearch at UBS Warburg in New York. For the industry, top-linepremium growth is still not resulting in bottom-line earningsgrowth, he said.

Focusing on homeowners issues discussed by Allstate, Chubb, SAFECOand others, Mr. Lewis said analysts had already known that rateswere inadequate. "But I was taken aback by the magnitude of theproblem and that it intensified so quickly when we got beyondweather-related claims," he added.

Calling some impacts of the diverse operating issues thatindividual insurers announced "eye-popping," he said, "I amhard-pressed, as you are, to see why everything came together atmid-year," noting that some of the issues--the reserve issues, inparticular--more typically emerge in year-end announcements.

Merrill Lynchs Mr. Cohen boiled the earnings issues down totwo--claims inflation and loss reserves.

"In areas like homeowners, property values and repair costs havebeen steadily going up. But the industry had been seeing thisbefore. Those companies that seemed immune--that had not seen muchimpact of these issues in the past--saw these [trends] become moreof an issue in the second quarter," he said. "Im not surewhy."

With respect to loss reserves, he said that in addition to puttingup reserves, many companies "were unable or unwilling to releasereserves in the second quarter," citing Allstate and St. Paul asexamples.

"We were not terrifically surprised that CNAs reserves were short,"he said, noting that Merrill Lynch had estimated a shortfall in aMay reserve study that the firm published. "As to why they chose toaddress their asbestos issue now--I dont have a great answer," hesaid.

"When companies decide to look at asbestos depends on themanagement team," said Alain Karaoglan, equity research analyst atDeutsche Banc Alex. Brown in New York. He noted, for example, thatAllstate undertakes a reserve review every third quarter.

Rejecting the possibility that some companies engaged in cleanupactivities in the first half of 2001 to meet past promises ofimproved earnings by year-end, Mr. Cohen said, "At some point, youhave to recognize the claims."

And according to officials at CNA and American Financial, therewere more claims to recognize during the quarter.

During recent conference calls, the companies described theemergence of non-product claims, claims being submitted on behalfof individuals with no illnesses, and increased numbers ofsecondary manufacturing claims. Such trends had previously beendescribed in industry studies by Tillinghast-Towers Perrin and A.M.Best. (See NU, Oct. 16, 2000, page 1; Nov. 13, 2000, page6; June 4, 2001, page 2; and July 16, 2001, page S-20.)

"Why now? Weve decided to step up reserves now for two basicreasons," said CNA Chairman and CEO Bernie Hengesbaugh during CNAsearnings conference call. "First of all, with regard to asbestos,we definitely did not want to fall into pay-as-you-go mode with allof the uncertainty that that implies. Secondly, these actionsannounced today, with our continuing focus on underwritingexcellence and expense reduction, [are] going to enable CNA toderive improved operating performance--and position us very wellgoing forward."

CNAs actions, however, support concerns for the industry as awhole, say analysts like those at Fitch in Chicago. In a recentstatement, Fitch analysts said they are concerned not just with theasbestos reserve actions, but equally with the charges on businesswritten in recent years. The statement also announced the ratingagencys intention to review ratings of all p-c insurers andreinsurers with material commercial lines exposures over the nextseveral weeks.

For the industry, "deficiencies in recent accident years call intoquestion the adequacy of commercial lines premium rates in 2000 and2001," Fitch said. In spite of double-digit premium increases,earnings "will actually be lower than levels currently beingreported by many insurers," Fitch said.

"We are discouraged and disappointed," said UBS Warburgs Mr. Lewis."Certainly many of the individual problems of the second quarterare going to create an ongoing dampening effect on industryearnings" for the year.

More and more individual companies will have issues, he said, andanalysts "will continue to talk about separation between losers andwinners--those that addressed problems earlier, those thatexercised more disciplined underwriting practices in 1998 and1999," he said.

"Even saying that, we as analysts are going to be hard-pressed todo anything but lower earnings estimates for the remainder of2001," he added.

Mr. Karaoglan still expects the promise of improved results byyear-end 2001 to be achieved by many insurers. But as to how muchthey will improve, "we will have to ratchet down our expectations,"he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, August 20, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.


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