Profits Fell, Losses Climbed for P/C Industry

It’s pretty much common knowledge by now that the property and casualty insurance industry suffered tremendous losses in 2001, and although the tragedies of September 11 can be blamed for much of the economic devastation, the losses cannot be entirely attributed to that single day. Poor underwriting results, a stock market meltdown and high number of catastrophes in the first half of the year also spelled trouble for the industry.

A couple of industry-watching groups recently came out with numbers for 2001—numbers that show the P/C industry recorded its first-ever annual net loss after taxes last year. Weiss Ratings of Beach Gardens, Fla., reported that insurers lost $9 billion in 2001, compared with a profit of $26 billion 2000. A study by Insurance Services Office Inc. (ISO) showed that the industry lost $7.9 billion compared with $20.6 billion in profits the previous year. Although the numbers don’t exactly match, most likely due to differing methods of conducting the separate studies, they do add up to one thing—huge losses.

Weiss Ratings noted that by the end of 2001 the industry had racked up a record $381 billion in claims, an 86 percent increase over $205 billion in claims reported the year before. Those claims weren’t spread evenly among the 2,653 companies Weiss analyzed. Some 34.1 percent of the companies studied—905 in all—were affected by the claims. And three large insurers, State Farm Mutual Auto Insurance Company, General Reinsurance Corp. and State Farm Fire and Casualty Company, each lost more than $1 billion in 2001—accounting for 59 percent of the year’s total of $9 billion in losses.

The ISO study, “Insurer Financial Results: 2001,” noted that the industry’s surplus fell to $289.6 billion by the end of 2001, a decline of 8.7 percent. That lowering of surplus, combined with 2000’s 5.1 percent decline, represents the first back-to-back declines in surplus since 1984.

Both the ISO report and the Weiss study cited 9/11 losses as only part of the story.

“The industry was hit hard by the staggering claims from the terrorist attacks,” said Martin D. Weiss, Ph.D., chairman of Weiss Ratings Inc., in a statement. “It would be a mistake, however, to blame all of the industry’s troubles on September 11. The economic malaise, the rash of corporate bankruptcies, and the market downturn have also taken their toll.”

According to ISO, the statutory financial statements filed by U.S. insurers indicate only $10 billion of net underwriting losses from the attack were included in the companies’ 2001 results. Roughly $9 billion of the $10 billion recorded for 2001 were loss and loss-adjustment expenses (LLAE) and about $1 billion was attributed to additional reinsurance costs, mostly reinstatement premiums. Estimating that U.S. insurers will ultimately bear around $25 billion in net underwriting losses from the attacks, John Kollar, ISO’s vice president for consulting and research, stated, “This means U.S. insurers may be hit with another $15 billion in losses from the terrorist attack on September 11.”

The ISO study estimated that the industry suffered an additional $7.5 billion in catastrophe losses in 2001, which, combined with the $9 billion attributed to 9/11 brings the year’s catastrophe loss total to $16.5.

Other contributing factors to the industry’s falling bottom line in 2001 were a 10.9 percent increase in non-catastrophe LLAE and a record 8.9 percent decrease in net investment income, according to the ISO study.

One bright spot noted by the ISO was that the industry experienced an 8.1 percent growth in premium during 2001, compared with a 5.3 percent growth in 2000, 1.9 percent in 1999 and an all-time low of 1.8 percent in 1998.

Indications are that growth in earned premium is continuing this year. In a joint study recently issued by the ISO and the National Association of Independent Insurers (NAII), earned premium rose by 8.1 percent to $82.9 billion in the first quarter of 2002, compared with $76.7 billion in first quarter 2001. However, losses in investment income and declines in realized capital gains continue to plague the industry. Net income for the U.S. P/C industry fell in the first quarter of this year by 7.3 percent to $5.1 billion, compared with $5.5 billion in net income for the first quarter of 2002.

Topics USA Carriers Profit Loss Market Property Casualty