U.S. insurers incur first-ever annual net loss for 2001

U.S. property and casualty insurers produced a negative return on equity of 2.7% for the 2001 financial year compared with a 6.5% ROE reported the year before. This plunge into the red resulted from skyrocketing catastrophe claims, including losses arising from the September 11 terrorist attacks, while investment earnings and capital gains withered over the course of the year. The U.S. industry’s 2001 yearend results show a massive drop from being marginally profitable in 2000 with net income of US$20.6 billion to the latest 12-month net loss of US$7.9 billion, says the Insurance Services Office (ISO) and the National Association of Independent Insurers (NAII).

The industry’s 2001 net loss on underwriting rose by nearly 70% year-on-year to US$53 billion while net investment income dropped by 9% over the same period to US$37 billion. Realized gains also suffered, with insurers reflecting only a modest US$7 billion gain for 2001 against the US$16.2 billion made for 2000. Total investment gains (investment income and realized gains) clocked in at US$44 billion for the 2001 financial year compared with US$57 billion reported for the year prior. “Insurers’ ability to use investment gains to paper over losses on underwriting evaporated last year. In 2000, overall investment gains exceeded underwriting losses by US$7.2 billion. But, in 2001, investment gains fell short of underwriting losses by US$26.7 billion. Though not widely reported, capital losses on investments in 2001 wiped out more surplus than the US$10 billion in terrorism losses included in insurers’ reported result,” says John Kollar, vice president of consulting and research at the ISO.

The worsening claims environment in 2001, mostly reflected by increased frequency and cost of catastrophe losses, boosted the industry’s combined ratio to an almost record high of 116% compared with the 110.1% ratio reported at the end of 2000. Catastrophe losses (before reinsurance) amounted to US$24.1 billion for 2001 compared with US$4.6 billion reported for the previous year. Roughly 70% of 2001’s cat cost resulted from the terrorist attacks.

Net written premiums for the year rose by about 8% to US$323.9 billion while net earned premiums grew at a more sedate 6% year-on-year rate. Falling investment returns, combined with a string of catastrophes and generally inadequate pricing, resulted in the industry’s surplus dropping 8.7% to US$289.6 billion for 2001 compared with US$317.4 billion reported at the end of 2000. While the September 11 terrorist attacks left their mark on insurers for 2001, much of the claims costs associated with the event have still to make their way onto insurers’ balance-sheets, Kollar observes. “Subtracting losses covered by foreign insurers and reinsurers, U.S. insurers may ultimately face US$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 US$10 billion of that amount in their reported results for 2001.”

Robert Hartwig, chief economist at the Insurance Information Institute (III), notes that the industry’s devastating underwriting result for 2001 was not just a result of the September 11 terrorist attacks. The industry’s underwriting loss for the year rose by 85.5%, he adds, “while the September 11 terrorist attack also contributed significantly to the increase [in the underwriting loss], it is important to note that statutory underwriting losses were already up 55.4% through the first half of 2001, well before the attacks occurred”. Hartwig expects “significant underwriting losses” will surface through insurers’ returns for 2002. “As a result, there is every reason to believe that the current hard market will remain intact through 2003.”