U.S. insurers incur first-ever annual net loss on the back of cat costs and plummeting investment returns

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 for the previous year. This poor financial performance resulted from skyrocketing catastrophic claims, including losses arising from the September 11 terrorist attacks, while investment earnings and capital gains withered over the course of the year. The 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, according to figures compiled by 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, with the difference relating to mostly storm losses such as Tropical Storm Allison. In contrast, Net written premiums for the year rose by about 8% to US$323.9 billion from the previous year’s US$299.6 billion. Net earned premiums grew at a more sedate 6% rate year-on-year, with the cost of claims far outpacing this revenue growth.Falling investment returns, combined with a string of catastrophe-related losses and generally inadequate pricing, resulted in the industry’s surplus dropping by 8.7% to US$289.6 billion for 2001 compared with US$317.4 billion reported at the end of the previous year. While the September 11 terrorist attacks did leave their mark on insurers results 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% year-on-year, 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". Insurers have to focus on general underwriting discipline and bringing rates back into line, Hartwig observes, a process that will take several years to fully accomplish. "The industry is still coming to terms with the sins of the past and the cost drivers of the future, as the deteriorating fundamentals vividly reveal. Restoring rate adequacy and underwriting discipline is a process that will take years. For this reason, significant underwriting losses can be expected for many insurers through 2002. As a result, there is every reason to believe that the current hard market will remain intact through 2003."