P-C First-Half Income Falls 76 Percent

A 6 percent drop in the industrys surplus level accompanied the net income decline from year-end 2000. Surplus, which was $317.4 billion at year-end 2000, fell below $300 billion to $298.2 billion as of June 30.

The $19.1 billion surplus decline compares with a decline of $8.3 billion in first-half 2000, according to ISO and NAII.

The first-half net income decline of $7.9 billion reflects a 39.2 percent increase in the industrys net loss on underwriting to $19.6 billion in first-half 2001, up from $14.1 billion in first-half 2000.

The combined ratio deteriorated 2.4 points to 111.2 in the first half.

"Catastrophe losses had a major effect on results in first-half 2001. The $6.6 billion in catastrophe losses during the period were the second-highest for any first-half since 1949, even when inflation is taken into account," said John Kollar, ISOs vice president for consulting and research.

"Though it is too early to know exactly what the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon will cost insurers, there is a real possibility that insurers will suffer record-high catastrophe losses for the year as a whole," Mr. Kollar said.

"The industry's income in first-half 2001 also suffered from deterioration in investment results, as both ordinary investment income and realized capital gains declined compared with what they were a year ago," said Diana Lee, the NAIIs vice president for research services. "High catastrophe losses and poor investment results were a double blow to insurers' bottom-line net income."

Realized capital gains dropped 21 percent to $5.5 billion from $7 billion in first-half 2000.

Unrealized capital losses of $18.4 billion during this years first halfnearly double the $9.7 billion in unrealized capital losses during the first half a year agofigured heavily in the industry surplus decline.

Net losses on underwriting escalated in this years first half despite acceleration in premium growth. Industry net written premiums for first-half 2001 were $163.1 billion, up $14.9 billion, or 10 percent, from $148.2 billion in the period a year ago.

The 10 percent increase in written premiums compares with a 4.3 percent increase in the first half of 2000 and is the largest first-half increase in premiums since 1987.

The deterioration in underwriting results reflects growth in overall loss and loss-adjustment expenses that exceeded premium growth.

Overall loss and loss-adjustment expenses rose to $129.6 billion in first-half 2001, up $15.9 billion, or 14 percent, from $113.8 billion in first-half 2000.

Catastrophe losses nearly doubled, jumping $3.2 billion, or 93 percent, to $6.6 billion in first-half 2001 from $3.4 billion in first-half 2000, according to ISO's Property Claim Services unit.

Non-catastrophe loss and loss-adjustment expenses climbed $12.7 billion, or 11.5 percent, to $123 billion in first-half 2001 from $110.3 billion in first-half 2000.

"About the only positive in first-half results was the acceleration in premium growth to 10 percent in first-half 2001. With the nations gross domestic product in first-half 2001 being 4.2 percent above its level a year ago, premiums grew more than twice as fast as the economy," Mr. Kollar said.

The researchers also took note of declines in interest rates that could lead to continued declines in investment income, as well as equity market declines.

The S&P 500 was down 7.3 percent year-to-date as of June 30 and 17.2 percent as of Monday, Sept. 10, just before the terrorist attacks on New York's World Trade Center and the Pentagon, Ms. Lee noted.

Ms. Lee added that if these trends should continue, "some insurers may find themselves tempted to start cutting prices to attract new premiums they can use to pay losses on the policies they've already written. That, in turn, could spark competitive pressures that lead to slower premium growth and further deterioration in underwriting results."

For the second quarter of 2001, the industry had a consolidated net loss after taxes of $3 billion, compared with net income of $4.3 billion in second-quarter 2000.

"The last time the industry experienced a quarterly net loss after taxes was first-quarter 1994," Mr. Kollar noted. "Then, as now, catastrophes were a major factor. But this time the situation is exacerbated by an 11 percent increase in non-catastrophe loss and loss adjustment expenses, a 6.8 percent decline in net investment income, and a 40.2 percent decline in realized capital gains."

Referring to a $5.8 billion net operating loss, as well as the $3 billion net loss after taxes for second-quarter 2001, Ms. Lee said the figures "send two clear messages."

"First, insurers need to continue focusing on managing their catastrophe risk. Second, insurers cannot count on investment gains to offset surging non-catastrophe losses," she said.

Written premiums totaled $81.1 billion for second-quarter 2001, up 8.6 percent from $74.7 billion for second-quarter 2000.

The second-quarter combined ratio was 116.2, up 5.8 percentage points compared to 110.4 in last years second quarter.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 1, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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