Property/Casualty Industry First-Half Net Income Plunges by 76 Percent and Surplus Drops as Underwriting and Investment Results Deteriorate

January 1, 2011 / 11 min read

JERSEY CITY, N.J., September 18, 2001 — The U.S. property/casualty industry's net income after taxes dropped to $2.5 billion in this year's first half, down $7.9 billion or 75.6 percent from the industry's net income a year ago. The industry's surplus fell $19.1 billion, or 6 percent, to $298.2 billion at June 30 from $317.4 billion at year-end 2000, according to Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

The $7.9 billion decline in net income after taxes in this year's first half reflects a 39.2 percent increase in the industry's net loss on underwriting to $19.6 billion in first-half 2001 from $14.1 billion in first-half 2000.

Other factors contributing to the fall in net income include a 5.2 percent decline in net investment income to $18.4 billion in first-half 2001 from $19.4 billion a year ago, and a 21 percent drop in realized capital gains to $5.5 billion from $7 billion in first-half 2000.

In addition, the industry suffered a $684 million loss on other miscellaneous operations in first-half 2001, after earning $1 billion on such operations in first-half 2000.

Partially offsetting these adverse developments, the industry's federal income taxes fell 63 percent to $1.1 billion for first-half 2001 from $2.9 billion a year ago.

The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 111.2 percent in the first half of this year, 2.4 percentage points worse than the 108.8 percent a year ago.

"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," observed John J. Kollar, ISO's vice president for consulting and research. "Though it is too early to know exactly what the September 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."

First-half catastrophe losses were higher only in 1994, when the Northridge earthquake struck southern California. If catastrophe losses in first-half 2001 had remained the same as in first-half 2000, the industry's combined ratio would have been 109.1 percent — more than 2 full percentage points better than the 111.2 percent for the period.

"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," commented Diana Lee, the NAII's vice president for research services. "High catastrophe losses and poor investment results were a double blow to insurers' bottom-line net income."

The industry's consolidated surplus — its assets minus its liabilities — declined $19.1 billion in first-half 2001 despite $2.5 billion in net income after taxes, $1.1 billion in new funds paid in, and $1.7 billion in miscellaneous additions to surplus during the period. Factors contributing to the decline in surplus include $18.4 billion in unrealized capital losses and $6.1 billion in dividends to shareholders.

The figures are consolidated estimates for the entire industry based on the reports of insurers that account for 96 percent of the U.S. property/casualty insurance business.

The $19.1-billion decline in surplus in first-half 2001 compares with a decline of $8.3 billion in first-half 2000. The $2.5 billion in net income during first-half 2001 is down from $10.5 billion a year ago. The $1.1 billion in new funds paid in during first-half 2001 is down from $1.4 billion in first-half 2000. The $1.7 billion in miscellaneous additions to surplus during the first six months of 2001 compares with $4.4 billion in miscellaneous charges against surplus during the corresponding period in 2000.

Insurers' $18.4 billion in unrealized capital losses during this year's first half are nearly double the $9.7 billion in unrealized capital losses during the first half a year ago. The $6.1 billion in dividends to shareholders in first-half 2001 is virtually unchanged from the corresponding figure for first-half 2000.

Net losses on underwriting escalated in this year's 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 jumped $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 (PCS) 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.

The deterioration in underwriting results also reflects increases in other underwriting expenses, which grew 5.7 percent to $43.2 billion in first-half 2001 from $40.9 billion in first-half 2000.

Underwriting results would have been worse were it not for a 62.4-percent decline in dividends to policyholders to $730 million in first-half 2001 from $1.9 billion a year ago.

"About the only positive in first-half results was the acceleration in premium growth to 10 percent in first-half 2001. With the nation's 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," observed Kollar. "Premium growth in excess of economic growth suggests that firming in insurance markets is having a positive effect on insurers' top-line revenue. But, bottom-line, underwriting results will continue deteriorating as long as growth in premiums falls short of growth in losses," added Kollar.

"Perhaps the major risks at this juncture are that further declines in interest rates will lead to continued declines in investment income and that further weakness in stock prices will lead to more capital losses. Since the start of the year, the Federal Reserve has reduced a key overnight bank lending rate from 6.5 percent to 3.0 percent. The S&P 500 was down 7.3 percent year-to-date as of June 30 and 17.2 percent as of Monday, September 10, just before the attacks on the World Trade Center and the Pentagon," noted Lee.

"Should these trends 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," added Lee.

The underwriting loss in first-half 2001 amounts to 12.8 percent of the $153.9 billion in premiums earned during the period, up from 9.9 percent of the $142.5 billion in premiums earned during the first half of 2000.

Combining realized capital gains and net investment income (primarily dividends earned from stocks and interest on bonds), the industry's pre-tax investment gain fell 9.4 percent in first-half 2001 to $23.9 billion from $26.4 billion a year earlier.

The industry's pre-tax operating income — the sum of its gain or loss on underwriting, its net investment income, and other miscellaneous income — swung to a $1.9-billion loss in first-half 2001 from a $6.4-billion gain in first-half 2000.

Insurers suffered $12.9 billion in total capital losses — realized and unrealized — in first-half 2001, almost five times the $2.7 billion in total capital losses a year ago. The sharp increase in insurers' total capital losses in first-half 2001 reflects developments in financial markets beyond insurers' control. The 7.3 percent decline in the S&P 500 through June of this year compares with a 1-percent decline through June 2000.

Second-Quarter Results

For the second quarter of 2001, the industry's consolidated net income after taxes was negative $3 billion, compared with net income of positive $4.3 billion in second-quarter 2000 and net income of $5.5 billion in the first quarter of 2001.

The net loss after taxes for second-quarter 2001 consists primarily of $5.8 billion in pre-tax operating losses and $2.3 billion in realized capital gains. The industry recovered $539 million in federal income taxes in the second quarter of 2001, in contrast to the $1.3 billion in federal income taxes incurred in second-quarter 2000.

The industry's second-quarter pre-tax operating loss of $5.8 billion compares with pre-tax operating income of $1.7 billion in the period a year ago. The second-quarter 2001 operating loss consisted of a pre-tax underwriting loss of $13.5 billion, pre-tax net investment income of $8.9 billion, and $1.2 billion in losses on other miscellaneous operations.

The second-quarter pre-tax underwriting loss of $13.5 billion was 65.4 percent more than the $8.2 billion underwriting loss in the second quarter of 2000. Contributing to the increase in net losses on underwriting, catastrophe losses rose to $5.9 billion in the second quarter of 2001 from $1.5 billion in the second quarter of 2000, as reported by ISO's PCS unit.

Taking inflation into account, the $5.9 billion in catastrophe losses during second-quarter 2001 make the period the worst second quarter in terms of catastrophe losses since the start of ISO's data in 1949. The period was also the fourth worst of all 210 quarters since early 1949. The worst three-month period was third-quarter 1992, when Hurricanes Andrew and Iniki struck, followed by first-quarter 1994, when the Northridge earthquake hit, and third-quarter 1989, when Hurricane Hugo occurred.

The second-quarter 2001 underwriting loss represents 17.5 percent of $77.2 billion in premiums earned during the period, up from 11.3 percent of $72.2 billion in premiums earned during the second quarter of last year. The underwriting loss in the second quarter of 2001 includes $328 million of premiums returned to policyholders as dividends, down from $1.4 billion in second-quarter 2000.

The $8.9 billion of net investment income for the second quarter of 2001 was down 6.8 percent from $9.6 billion in the period a year ago. Realized capital gains for second-quarter 2001 were $2.3 billion, compared with $3.9 billion in second-quarter 2000. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $11.3 billion in 2001's second quarter, compared with $13.5 billion in the second quarter of 2000.

"The last time the industry experienced a quarterly net loss after taxes was first-quarter 1994," observed Kollar. "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."

"The operating loss and net loss after taxes for second-quarter 2001 send two clear messages," said Lee. "First, insurers need to continue focusing on managing their catastrophe risk. Second, insurers cannot count on investment gains to offset surging non-catastrophe losses," added Lee.

Written premiums totaled $81.1 billion for second-quarter 2001, up 8.6 percent from $74.7 billion for second-quarter 2000. That compares with second-quarter written premium growth of 5.5 percent for 2000 over 1999 and 1.1 percent for 1999 over 1998.

OPERATING RESULTS FOR 2001 and 2000
($ Millions)

FIRST HALF	2001	2000
NET WRITTEN PREMIUM	163,090	148,207
NET EARNED PREMIUM	153,935	142,469
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	129,643	113,751
STATUTORY UNDERWRITING GAIN (LOSS)	(18,902)	(12,162)
POLICYHOLDERS' DIVIDENDS	730	1,943
NET UNDERWRITING GAIN (LOSS)	(19,633)	(14,105)
PRE-TAX OPERATING INCOME	(1,903)	6,360
NET INVESTMENT INCOME EARNED	18,414	19,428
NET REALIZED CAPITAL GAIN (LOSS)	5,521	6,990
NET INVESTMENT GAIN	23,936	26,417
NET INCOME (LOSS) AFTER TAXES	2,547	10,457
SURPLUS (CONSOLIDATED)	298,230	326,005
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	356,376	355,008
COMBINED RATIO, POST-DIVIDENDS (%)	111.2	108.8

SECOND QUARTER	2001	2000
NET WRITTEN PREMIUM	81,149	74,715
NET EARNED PREMIUM	77,225	72,177
INCURRED LOSS & LOSS ADJUSTMENT EXPENSE	68,840	58,139
STATUTORY UNDERWRITING GAIN (LOSS)	(13,219)	(6,747)
POLICYHOLDERS' DIVIDENDS	328	1,443
NET UNDERWRITING GAIN (LOSS)	(13,547)	(8,190)
PRE-TAX OPERATING INCOME	(5,845)	1,736
NET INVESTMENT INCOME EARNED	8,950	9,607
NET REALIZED CAPITAL GAIN (LOSS)	2,343	3,917
NET INVESTMENT GAIN	11,293	13,524
NET INCOME (LOSS) AFTER TAXES	(2,963)	4,332
SURPLUS (CONSOLIDATED)	298,230	326,005
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES	356,376	355,008
COMBINED RATIO, POST-DIVIDENDS (%)	116.2	110.4

Release: Immediate

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

Sue McKenna (NAII)
847-297-7800

Loretta Worters (III)
212-669-9200