U.S. insurers results: from ground-zero to zero

U.S. property and casualty insurers incurred their worst financial loss for the first nine months of last year since the devastation caused by Hurricane Andrew in 1992, observes the Insurance Services Office (ISO) and the National Association of Independent Insurers (NAII). The U.S. industry’s ROE for the latest nine-month reporting period sank to a negative 1.5% against the 6.3% positive return made for the same period in 2000.

Insurers posted a US$3.1 billion net loss for the nine months to end September 2001 compared with US$16.8 billion in net income reported for the same period a year prior. The net underwriting loss soared nearly 80% year-on-year to US$37.5 billion, with losses associated with the September 11 terrorist attacks accounting for about US$10 billion of this amount. As a result, the industry’s combined ratio at the end of the nine months stood at 114.5%, nearly double the 108.4% seen at the end of September 2000. “Our analysis suggests that, as of September 30, U.S. insurers had only posted about US$10 billion in net losses from the [terrorist] attack. With many of the losses from September 11 yet to hit insurers’ results, and the industry posting a net loss through the nine months, we seem headed toward the first-ever net loss for a whole year,” says John Kollar, vice president of consulting and research at the ISO.

While net written premiums rose by 8.8% to US$247 billion for the first nine months of 2001, this rate of growth was outstripped by an 18% jump in claims costs. “About the only positive in the results through the nine months of 2001 was the acceleration in premium growth to 8.8%. With the nation’s gross domestic product [GDP] up just 3.8%, premiums grew more than twice as fast as the economy,” comments Kollar.

The blow to the underwriting account, combined with declining investment returns and sharply lower realized gains, resulted in nearly US$36 billion being wiped off from the industry’s surplus, which stood at the end of September 2001 at US$282 billion. This drop in value compares with a US$9.5 billion decline reported for the first nine months of 2000.

Poor investment performance also took a toll, with the industry’s pre-tax investment gain (combined realized gains and net investment income) clocking in 18% lower for the latest nine months at US$34.4 billion against the US$42 billion reported for the same period the previous year. Net investment income fell by 5.7% year-on-year to US$27.5 billion while realized capital gains plunged by a dramatic 45.7% to US$6.9 billion. “Most analysts have focused on the effects of the September 11 terrorist attack, but the industry also suffered from deterioration in investment results through the nine months of 2001,”comments Diana Lee, vice president of research services at NAII.

Robert Hartwig, chief economist at the Insurance Information Institute (III), points out that the decrease in the industry’s capacity, reflected by the substantial drop in surplus, could bode well for the insurers as they enter the 2002 financial year. “…combined with heightened risk, strong demand and a return to more rational pricing are the major drivers of the current hard market. Capacity has now shrunk to less than what it was at yearend 1997.”

Overall, the view expressed by market analysts consulted by the III in preparing its “2002 outlook report” indicate that written premiums will rise by about 15% in 2002, with the combined ratio dropping back to 108%. “The forecasts for 2002 suggest that the industry will emerge from the financial shock of September 11 with its best prospects for growth in many years as underwriting performance improves substantially.”

rty and casualty insurers incurred their worst financial loss for the first nine months of last year since the devastation caused by Hurricane Andrew in 1992, observes the Insurance Services Office (ISO) and the National Association of Independent Insurers (NAII). The U.S. industry’s ROE for the latest nine-month reporting period sank to a negative 1.5% against the 6.3% positive return made for the same period in 2000.

Insurers posted a US$3.1 billion net loss for the nine months to end September 2001 compared with US$16.8 billion in net income reported for the same period a year prior. The net underwriting loss soared nearly 80% year-on-year to US$37.5 billion, with losses associated with the September 11 terrorist attacks accounting for about US$10 billion of this amount. As a result, the industry’s combined ratio at the end of the nine months stood at 114.5%, nearly double the 108.4% seen at the end of September 2000. “Our analysis suggests that, as of September 30, U.S. insurers had only posted about US$10 billion in net losses from the [terrorist] attack. With many of the losses from September 11 yet to hit insurers’ results, and the industry posting a net loss through the nine months, we seem headed toward the first-ever net loss for a whole year,” says John Kollar, vice president of consulting and research at the ISO.

While net written premiums rose by 8.8% to US$247 billion for the first nine months of 2001, this rate of growth was outstripped by an 18% jump in claims costs. “About the only positive in the results through the nine months of 2001 was the acceleration in premium growth to 8.8%. With the nation’s gross domestic product [GDP] up just 3.8%, premiums grew more than twice as fast as the economy,” comments Kollar.

The blow to the underwriting account, combined with declining investment returns and sharply lower realized gains, resulted in nearly US$36 billion being wiped off from the industry’s surplus, which stood at the end of September 2001 at US$282 billion. This drop in value compares with a US$9.5 billion decline reported for the first nine months of 2000.

Poor investment performance also took a toll, with the industry’s pre-tax investment gain (combined realized gains and net investment income) clocking in 18% lower for the latest nine months at US$34.4 billion against the US$42 billion reported for the same period the previous year. Net investment income fell by 5.7% year-on-year to US$27.5 billion while realized capital gains plunged by a dramatic 45.7% to US$6.9 billion. “Most analysts have focused on the effects of the September 11 terrorist attack, but the industry also suffered from deterioration in investment results through the nine months of 2001,”comments Diana Lee, vice president of research services at NAII.

Robert Hartwig, chief economist at the Insurance Information Institute (III), points out that the decrease in the industry’s capacity, reflected by the substantial drop in surplus, could bode well for the insurers as they enter the 2002 financial year. “…combined with heightened risk, strong demand and a return to more rational pricing are the major drivers of the current hard market. Capacity has now shrunk to less than what it was at yearend 1997.”

Overall, the view expressed by market analysts consulted by the III in preparing its “2002 outlook report” indicate that written premiums will rise by about 15% in 2002, with the combined ratio dropping back to 108%. “The forecasts for 2002 suggest that the industry will emerge from the financial shock of September 11 with its best prospects for growth in many years as underwriting performance improves substantially.”