JERSEY CITY, N.J., Dec. 19, 2001 — The U.S. property/casualty industry posted a $3.1-billion net loss after taxes through nine-months 2001 — its first-ever net loss after taxes through nine months. In the same period last year, the industry posted $16.8 billion in net income after taxes.
Reflecting the net loss and unrealized capital losses on investments, the industry's surplus fell $35.5 billion, or 11.2 percent, to $281.9 billion at September 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 net loss after taxes through nine-months 2001 resulted primarily from sharply higher underwriting losses as claims from the September 11 terrorist attack began to hit insurers' bottom line. The industry's net loss on underwriting jumped 79.9 percent to $37.5 billion through nine-months 2001 from $20.8 billion through nine-months 2000.
Other factors contributing to the net loss include a 5.7 percent decline in net investment income to $27.5 billion through nine-months 2001 from $29.2 billion a year ago, and a 45.7 percent drop in realized capital gains to $6.9 billion from $12.8 billion through nine-months 2000. The industry also suffered a $41 million loss on other miscellaneous operations through nine-months 2001, after earning $583 million on such operations through nine-months 2000.
The industry incurred $51 million in federal income taxes for the period ending September 30, down from the $4.9 billion in federal income taxes incurred through nine-months 2000.
The combined ratio— a key measure of losses and other underwriting expenses per dollar of premium— deteriorated to 114.5 percent for nine-months 2001, 6.2 percentage points worse than the 108.4 percent for nine-months 2000.
"Most experts estimate the ultimate cost of the attack on the World Trade Center and the Pentagon at between $30 billion and $70 billion. While some of the losses will be covered by foreign insurers, our analysis suggests that, as of September 30, U.S. insurers had only posted about $10 billion in net losses from the attack," observed John J. Kollar, ISO's vice president for consulting and research.
"With many of the losses from September 11 yet to hit insurers' results, and the industry posting a net loss through nine months, we seem headed toward the first-ever net loss for a whole year," Kollar added.
"Most analysts have focused on the effects of the terrorist attack, but the industry also suffered from deterioration in investment results through nine-months 2001. Both ordinary investment income and realized capital gains declined from their levels a year ago," said Diana Lee, the NAII's vice president for research services. "In a replay of results through six months, catastrophe losses and poor investment returns once again delivered a double blow to insurers' bottom line through nine months."
The industry's consolidated surplus — its assets minus its liabilities — declined $35.5 billion through nine-months 2001. Factors driving the drop in surplus included the $3.1-billion net loss after taxes, $33.8 billion in unrealized capital losses on investments, and $8.1 billion in dividends to shareholders. The decline in surplus would have been larger were it not for $4.8 billion in new funds paid in and $4.8 billion in miscellaneous additions to surplus.
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 $35.5-billion decline in surplus in nine-months 2001 compares with a decline of $9.5 billion in nine-months 2000. The industry's $3.1-billion net loss for nine-months 2001 is a sharp reversal from $16.8 billion in net income for nine-months 2000.
The $33.8 billion in unrealized capital losses through nine-months 2001 is more than double the $14.6 billion in unrealized capital losses during nine-months 2000. The $8.1 billion in dividends to shareholders for nine-months 2001 is down $467 million, or 5.4 percent, from $8.6 billion for nine-months 2000.
The $4.8 billion in new funds paid in during the first three quarters of 2001 is more than four times the $1.1 billion in new funds paid in during the first three quarters of 2000. The $4.8 billion in miscellaneous additions to surplus during the first nine months of 2001 compares with $4.3 billion in miscellaneous charges against surplus during the corresponding period in 2000.
The miscellaneous additions to surplus through nine-months 2001 are primarily a result of accounting changes effective at the start of the year under the National Association of Insurance Commissioners' codification of statutory accounting principles.
Net losses on underwriting escalated during the first nine months of 2001 despite acceleration in premium growth. Industry net written premiums for nine-months 2001 were $246.9 billion, up $20 billion, or 8.8 percent, from $226.9 billion in the corresponding period a year ago. The 8.8-percent increase in written premiums compares with a 5-percent increase for nine-months 2000 and is the largest nine-month increase in premiums since 1987.
Underwriting results deteriorated because loss and loss adjustment expenses grew faster than premiums. Loss and loss-adjustment expenses rose to $205.2 billion for nine-months 2001, up $31.2 billion, or 17.9 percent, from $174 billion for nine-months 2000. The increase in loss and loss-adjustment expenses would have been much greater if insurers had finished totaling September 11 losses before the third quarter closed.
In addition to an estimated $10 billion in terrorism losses, nine-month 2001 results include $7 billion in losses from other catastrophes, according to ISO's Property Claim Services (PCS) unit. Total catastrophe losses through nine-months 2001 are four-and-a-half times the $3.8 billion in catastrophe losses through nine-months 2000. Non-catastrophe loss and loss-adjustment expenses climbed an estimated $17.9 billion, or 10.5 percent, to $188.2 billion in nine-months 2001 from $170.2 billion in nine-months 2000.
The deterioration in underwriting results also reflects increases in other underwriting expenses, which grew 4.5 percent to $64.3 billion in nine-months 2001 from $61.5 billion in nine-months 2000.
Underwriting results would have been worse were it not for a 55.1-percent decline in dividends to policyholders to $1.1 billion in nine-months 2001 from $2.4 billion a year ago.
"About the only positive in results through nine-months 2001 was the acceleration in premium growth to 8.8 percent. With the nation's gross domestic product up just 3.8 percent, premiums grew more than twice as fast as the economy," observed Kollar.
"Clearly, firming in insurance markets is having a positive effect on insurers' top-line revenue. But, underwriting results will continue to deteriorate as long as growth in premiums falls short of growth in losses. Our numbers don't yet reflect the full cost of the attack on September 11," added Kollar.
"Perhaps the major risks at this juncture are that further weakness in stock prices will lead to more capital losses and that further declines in interest rates will lead to continued declines in investment income," said Lee. "The S&P 500 was down 21.2 percent year-to-date as of September 30. Since the start of the year, the Federal Reserve has reduced a key overnight bank lending rate a record eleven times, cutting it from 6.5 percent at the beginning of the year all the way down to 1.75 percent on December 11.
"Though the S&P 500 has risen a bit since September 30, it was nonetheless down 14.1 percent year-to-date as of the close of business on December 17. We could see renewed declines in stock markets if the hoped for economic recovery fails to materialize, or if we suffer a setback in the war against terrorism. Developments such as these could potentially lead to further interest rate cuts and still more weakness in insurers' investment income," added Lee.
The underwriting loss for nine-months 2001 amounts to 16.1 percent of the $233.1 billion in premiums earned during the period, up from 9.6 percent of the $217.1 billion in premiums earned during nine-months 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 17.9 percent in nine-months 2001 to $34.4 billion from $42 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 $10-billion loss in nine-months 2001 from an $8.9-billion gain in nine-months 2000.
Insurers suffered $26.8 billion in total capital losses — realized and unrealized — in nine-months 2001, almost 15 times the $1.8 billion in total capital losses a year ago. The sharp increase in insurers' total capital losses in nine-months 2001 reflects developments in financial markets beyond insurers' control. The 21.2-percent decline in the S&P 500 through September of this year compares with a 2.2-percent decline through September 2000.
For the third quarter of 2001, the industry's consolidated net loss after taxes was$5.7 billion, compared with a net loss of $3 billion in second-quarter 2001 and net income of $6.4 billion in third-quarter 2000.
The net loss after taxes for third-quarter 2001 consists primarily of $8.1 billion in pre-tax operating losses and $1.4 billion in realized capital gains. The industry recovered $1 billion in federal income taxes in the third quarter of 2001, in contrast to the $2 billion in federal income taxes incurred in third-quarter 2000.
The industry's third-quarter pre-tax operating loss of $8.1 billion compares with pre-tax operating income of $2.6 billion in the period a year ago. The third-quarter 2001 operating loss consisted of a pre-tax underwriting loss of $17.8 billion, pre-tax net investment income of $9.1 billion, and $643 million in earnings on other miscellaneous operations.
The third-quarter pre-tax underwriting loss of $17.8 billion was more than two-and-a-half times the $6.7 billion underwriting loss in the third quarter of 2000. While losses from terrorism had a major effect on third-quarter underwriting results, insurers also suffered $370 million in losses from other catastrophes, according to ISO's PCS unit. Insurers suffered $315 million in catastrophe losses in third-quarter 2000.
The third-quarter 2001 underwriting loss represents 22.6 percent of $79.1 billion in premiums earned during the period, up from 9 percent of $74.7 billion in premiums earned during the third quarter of last year. The underwriting loss in the third quarter of 2001 includes $357 million of premiums returned to policyholders as dividends, down from $478 million in third-quarter 2000.
The $9.1 billion of net investment income for the third quarter of 2001 was down 6.8 percent from $9.7 billion in the period a year ago. Realized capital gains for third-quarter 2001 were $1.4 billion, compared with $5.8 billion in third-quarter 2000. The industry's pre-tax net investment gain, which combines net investment income and realized capital gains, was $10.5 billion in 2001's third quarter, compared with $15.5 billion in the third quarter of 2000.
"The industry has now experienced two consecutive quarters of net losses after taxes. This hasn't happened since the third and fourth quarters of 1992, the year of Hurricanes Andrew and Iniki," observed Lee. "Then, as now, catastrophes were a major factor, and investment income was declining. But, this time, the situation is exacerbated by a 75.5-percent decline in realized capital gains. In 1992, insurers were able to realize more capital gains to offset some of the deterioration in other results."
"The operating loss and net loss after taxes for third-quarter 2001 send two clear messages," said Kollar. "First, insurers need to continue focusing on managing their exposure to catastrophes, manmade or otherwise. Second, insurers must focus on fundamentals such as underwriting and pricing as they cannot count on investment gains to offset poor underwriting results."
Written premiums totaled $83.8 billion for third-quarter 2001, up 6.5 percent from $78.7 billion for third-quarter 2000. Written premiums in third-quarter 2000 were up 6.3 percent compared with premiums a year earlier, while premiums in third-quarter 1999 were up 3.4 percent compared with premiums in third-quarter 1998.
OPERATING RESULTS FOR 2001 and 2000
|NET WRITTEN PREMIUM||246,860||226,895|
|NET EARNED PREMIUM||233,052||217,125|
|INCURRED LOSS & LOSS ADJUSTMENT EXPENSE||205,155||173,998|
|STATUTORY UNDERWRITING GAIN (LOSS)||(36,393)||(18,409)|
|NET UNDERWRITING GAIN (LOSS)||(37,480)||(20,830)|
|PRE-TAX OPERATING INCOME||(10,020)||8,930|
|NET INVESTMENT INCOME EARNED||27,501||29,177|
|NET REALIZED CAPITAL GAIN (LOSS)||6,940||12,789|
|NET INVESTMENT GAIN||34,442||41,965|
|NET INCOME (LOSS) AFTER TAXES||(3,131)||16,828|
|LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES||368,013||355,898|
|COMBINED RATIO, POST-DIVIDENDS (%)||114.5||108.4|
|NET WRITTEN PREMIUM||83,770||78,687|
|NET EARNED PREMIUM||79,117||74,656|
|INCURRED LOSS & LOSS ADJUSTMENT EXPENSE||75,512||60,246|
|STATUTORY UNDERWRITING GAIN (LOSS)||(17,490)||(6,247)|
|NET UNDERWRITING GAIN (LOSS)||(17,847)||(6,725)|
|PRE-TAX OPERATING INCOME||(8,117)||2,570|
|NET INVESTMENT INCOME EARNED||9,087||9,749|
|NET REALIZED CAPITAL GAIN (LOSS)||1,419||5,799|
|NET INVESTMENT GAIN||10,506||15,548|
|NET INCOME (LOSS) AFTER TAXES||(5,678)||6,372|
|LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES||368,013||355,898|
|COMBINED RATIO, POST-DIVIDENDS (%)||121.1||107.6|
Michael R. Murray (ISO)
Sue McKenna (NAII)
Loretta Worters (III)