P/C Industry Suffers First-Ever Net Loss in 2001; Surplus Drops as Terrorist Attack and Poor Investment Results Pummel Earnings

January 1, 2011 / 10 min read

JERSEY CITY, N.J., April 15, 2002 — The property/casualty insurance industry suffered a $7.9 billion net loss after taxes in 2001 — its first-ever net loss for a full year and a sharp swing from the $20.6 billion in net income in 2000. The industry's statutory surplus, or net worth, fell $27.7 billion, or 8.7 percent, to $289.6 billion at year-end 2001 from $317.4 billion at year-end 2000, Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII) reported today.

Factors contributing to the industry's net loss included sharply higher losses on underwriting due in part to the terrorist attack on September 11 and sharply lower gains on investments consequent to declines in interest rates and stock markets.

The industry's net loss on underwriting after policyholder dividends ballooned to $53 billion in 2001, up 69.7 percent from $31.2 billion the year before. The industry's net investment income (primarily dividends earned on stocks and interest on bonds) fell to $37.1 billion last year, down a record 8.9 percent from $40.7 billion the year before. Realized capital gains on insurers' investments dropped to $6.9 billion, falling 57.5 percent from $16.2 billion in 2000.

Partially offsetting these adverse developments, insurers earned $760 million in income from miscellaneous other operations last year, up from $373 million in 2000. Also, insurers recovered $364 million in federal income taxes, after incurring $5.5 billion in income taxes in 2000.

"Most experts estimate losses, including workers compensation and liability lines, from the September 11 attack at somewhere between $30 billion and $70 billion," said John J. Kollar, ISO vice president — consulting and research. "Subtracting losses covered by foreign insurers and reinsurers, U.S. insurers may ultimately face $25 billion in net underwriting losses from the terrorist attack. But ISO's analysis of insurer financial statements suggests that U.S. companies included only about $10 billion of that amount in their reported results for 2001."

"Many victims of the attack still appear to be weighing whether to seek compensation from private sources or to forgo compensation from private sources and accept compensation from the federal government. And, insurers may still be trying to resolve business interruption and other complex claims," Kollar observed.

The combined ratio — a measure of losses and underwriting expenses per dollar of premium — deteriorated to 116 percent in 2001, 5.9 percentage points worse than the industry's 110.1 percent combined ratio for 2000 and 8.2 percentage points worse than the 107.8 percent combined ratio for 1999. The industry's 116 percent combined ratio for 2001 is the third worst on record, exceeded only by the 116.5 percent for 1985 and the 118 percent for 1984.

"While terrorism and catastrophe losses certainly captured the headlines in 2001, they weren't the only factors leading to deterioration in underwriting results," said Diana Lee, NAII vice president — research services. "Even if catastrophe losses last year had stayed at the level they were in 2000 instead of rising, the combined ratio for 2001 would have been 111.8 percent — 1.7 percentage points worse than the combined ratio for 2000."

Net underwriting losses in 2001 amounted to 17 percent of the $312.4 billion in earned premiums during the year, up from 10.6 percent of the $294 billion in earned premiums during 2000.

ISO's and the NAII's industry figures are consolidated estimates, based on the reports of insurers that account for 96 percent of the U.S. property/casualty insurance business.

The $27.7-billion decline in surplus in 2001 resulted from the $7.9-billion net loss after taxes, $17.7 billion in unrealized capital losses on investments, $10.9 billion in dividends paid to stockholders, and $2.8 billion in miscellaneous charges against surplus. The decline in surplus would have been larger but for the record $11.6 billion in new funds raised by insurers as they sought to bolster their capital in the wake of the September 11 terrorist attack.

The deterioration in the industry's net loss on underwriting resulted primarily from a 15.6-percent increase in overall loss and loss-adjustment expenses to $276.1 billion in 2001 from $238.8 billion in 2000. Other underwriting expenses rose 5.3 percent to $86.9 billion last year from $82.6 billion the year before. Premiums returned to policyholders as dividends declined 40.1 percent to $2.3 billion in 2001 from $3.9 billion in 2000.

According to ISO's Property Claim Services® (PCSTM) unit, catastrophe losses before reinsurance recoveries rose to a record $24.1 billion last year from $4.6 billion the year before. The $24.1 billion includes $16.6 billion in property and business-interruption losses from the attack on September 11.

Combining the estimated net loss and loss-adjustment expenses after reinsurance from September 11 included in insurers' results through year-end 2001 with $7.5 billion in losses from other catastrophes, insurers recognized $16.5 billion in net catastrophe losses last year — nearly four times the $4.6 billion in catastrophe losses in 2000. Non-catastrophe loss and loss-adjustment expenses rose 10.9 percent to $259.7 billion in 2001 from $234.2 billion in 2000.

The industry's operating income — the sum of gains or losses on underwriting, net investment income and miscellaneous other income — fell $25 billion to negative $15.2 billion in 2001 from positive $9.9 billion the year before.

"The swing to an operating loss reflects deterioration in both underwriting and investment results. Last year's record 8.9-percent decline in investment income more than erased the 5.7-percent increase in 2000, with the industry's $37.1 billion in investment income in 2001 falling below its $38.9 billion in investment income in 1999," noted Lee. "The recent weakness in investment income reflects low yields on both new investments and funds that are re-invested as bonds mature, with the Federal Reserve Board having cut a key benchmark interest rate a record 11 times in 2001 from 6.5 percent at the start of the year to 1.75 percent at the end of the year. In addition, some insurers may have liquidated income-producing investments to pay claims and meet other cash calls," Lee added.

The industry's pre-tax net investment gain — the sum of net investment income and realized capital gains — fell $13 billion, or 22.8 percent, to $43.9 billion in 2001 from $56.9 billion in 2000.

Combining realized capital gains and unrealized capital losses, the industry suffered $10.8 billion in overall capital losses on investments last year, nearly five times the $2.3 billion in overall capital losses in 2000.

"Insurers' ability to use investment gains to paper over losses on underwriting evaporated last year. In 2000, overall investment gains — the sum of investment income and overall capital gains (losses) — exceeded underwriting losses by $7.2 billion. But, in 2001, investment gains fell short of underwriting losses by $26.7 billion," observed Kollar. "Though not widely reported, capital losses on investments in 2001 wiped out more surplus than the $10 billion in terrorism losses included in insurers' reported results," Kollar added.

"For two consecutive years, the industry has experienced overall capital losses on its investments, but that isn't surprising given what's happened in the financial markets," said Lee. "The Standard & Poor's (S&P) 500 dropped 13 percent in 2001 and 10.1 percent the year before. Other major market indicators also declined. With the S&P 500 having dropped another 3.9 percent year to date through April 11, the open questions are: Where will the markets go from here, and how will that affect future capital gains and surplus? Right now, it's hard to be optimistic," Lee observed.

The industry's net loss on underwriting grew by $21.8 billion in 2001 despite acceleration in premium growth. Net written premiums grew 8.1 percent last year to $324 billion, with premium growth increasing from 5.3 percent in 2000, 1.9 percent in 1999, and a record-low 1.8 percent in 1998.

"Premium growth perhaps was the only bright spot in the industry's otherwise bleak numbers. Last year's 8.1 percent increase in premiums is more than twice the 3.4 percent growth in the economy as measured by current dollar GDP," said Kollar.

"ISO MarketWatch™ data indicate the commercial lines pricing cycle turned positive in mid-1999, and commercial lines premiums have been rising ever since. But the industry is far from out of the woods. Catastrophe-adjusted underwriting results will continue to deteriorate as long as growth in premiums falls short of growth in non-catastrophe loss and loss-adjustment expenses. We are already hearing reports that increases in premiums may be beginning to slow," Kollar added.

Fourth-Quarter Results
The industry suffered a $4.8-billion net loss after taxes in fourth-quarter 2001. While better than the $5.6-billion net loss in the third quarter, the net loss in fourth-quarter 2001 compares with a profit of $3.7 billion in fourth-quarter 2000.

The net loss for fourth-quarter 2001 consisted primarily of $5.2 billion in pre-tax operating losses. The net loss for fourth-quarter 2001 also included $56 million in realized capital losses on investments. The industry recovered $415 million in income taxes in fourth-quarter 2001, contrasted with the $612 million in income taxes incurred in fourth-quarter 2000.

The industry's fourth-quarter 2001 pre-tax operating loss of $5.2 billion was a sharp swing from fourth-quarter 2000 pre-tax operating income of $927 million. The operating loss in fourth-quarter 2001 resulted from a $15.6-billion net loss on underwriting, which was partially offset by $9.6 billion in net investment income and $801 million in income from other miscellaneous operations.

The fourth-quarter 2001 $15.6-billion net loss on underwriting was one-and-a-half times the $10.4-billion loss on underwriting in fourth-quarter 2000. Underwriting results deteriorated despite a decline in catastrophe losses, which fell to $485 million in fourth-quarter 2001 from $815 million in fourth-quarter 2000, according to ISO's PCS unit.

The fourth-quarter 2001 underwriting loss represents 19.6 percent of $79.5 billion in earned premiums during the period, up from 13.5 percent of $76.9 billion in earned premiums during fourth-quarter 2000. The underwriting loss in the fourth quarter of 2001 included $1.2 billion of premiums returned to policyholders as dividends, down 15.4 percent from $1.5 billion in fourth-quarter 2000.

The $9.6 billion in net investment income in fourth-quarter 2001 was down 16.6 percent from $11.5 billion in fourth-quarter 2000. Realized capital losses of $56 million in fourth-quarter 2001 compare with realized capital gains of $3.4 billion in fourth-quarter 2000.

The industry's pre-tax net investment gain was $9.6 billion in fourth-quarter 2001, down 36.1 percent from $14.9 billion in fourth-quarter 2000.

Written premiums rose 6.2 percent to $77.3 billion in fourth-quarter 2001 from $72.8 billion in fourth-quarter 2000. Compared to year-ago levels, premiums increased 6.3 percent in fourth-quarter 2000 and 2.1 percent in fourth-quarter 1999.

OPERATING RESULTS FOR 2001 AND 2000 ($ Millions)
TWELVE MONTHS	2001	2000
NET WRITTEN PREMIUM	323,977	299,652
NET EARNED PREMIUM	312,368	294,024
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	276,120	238,781
STATUTORY UNDERWRITING GAIN (LOSS)	(50,655)	(27,324)
POLICYHOLDERS' DIVIDENDS	2,335	3,896
NET UNDERWRITING GAIN (LOSS)	(52,990)	(31,220)
PRE-TAX OPERATING INCOME	(15,164)	9,857
NET INVESTMENT INCOME EARNED	37,066	40,704
NET REALIZED CAPITAL GAIN (LOSS)	6,879	16,205
NET INVESTMENT GAIN	43,945	56,908
NET INCOME AFTER TAXES	(7,921)	20,559
SURPLUS (CONSOLIDATED)	289,649	317,361
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	372,604	356,498
COMBINED RATIO, POST-DIVIDENDS, PERCENT	116.0	110.1

FOURTH QUARTER	2001	2000
NET WRITTEN PREMIUM	77,269	72,757
NET EARNED PREMIUM	79,480	76,899
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	71,165	64,783
STATUTORY UNDERWRITING GAIN (LOSS)	(14,344)	(8,915)
POLICYHOLDERS' DIVIDENDS	1,248	1,476
NET UNDERWRITING GAIN (LOSS)	(15,592)	(10,391)
PRE-TAX OPERATING INCOME	(5,181)	927
NET INVESTMENT INCOME EARNED	9,610	11,527
NET REALIZED CAPITAL GAIN (LOSS)	(56)	3,416
NET INVESTMENT GAIN	9,554	14,943
NET INCOME AFTER TAXES	(4,822)	3,731
SURPLUS (CONSOLIDATED)	289,649	317,361
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	372,604	356,498
COMBINED RATIO, POST-DIVIDENDS, PERCENT	120.4	115.1

Release: Immediate

Contacts:
Michael R. Murray (ISO)
201-469-2339
mmurray@iso.com

Sue McKenna (NAII)
847-297-7800

Loretta Worters (III)
212-346-5500