P/C Industry’s 1stQ Net Income Falls 7.3 Percent

The U.S. property/casualty industry’s net income after taxes dropped 7.3 percent to $5.1 billion in first-quarter 2002 from $5.5 billion in first-quarter 2001, according to just released information from Insurance Services Office Inc. (ISO) and the National Association of Independent Insurers (NAII). The industry’s bottom line deteriorated as both net investment income and realized capital gains declined. Unlike investment results, underwriting results improved.

The industry’s net loss on underwriting declined 38 percent to $3.8 billion in first-quarter 2002 from $6.1 billion in first-quarter 2001. But the $2.3-billion improvement in net underwriting results was not enough to offset deterioration in investment results. The industry’s pre-tax net investment gain, which combines net investment income (primarily dividends earned from stocks and interest on bonds) and realized capital gains, fell $3.3 billion, or 26.4 percent, to $9.3 billion in first-quarter 2002 from $12.6 billion in first-quarter 2001. Net investment income dropped $0.5 billion, or 5.5 percent, to $8.9 billion from $9.5 billion. Realized capital gains dropped $2.8 billion, or 88.8 percent, to $0.4 billion in first-quarter 2002 from $3.2 billion in first-quarter 2001.

The figures are consolidated estimates for the entire industry based on the reports of insurers that account for 96 percent of the country’s property/casualty insurance business.

“The deterioration in investment results compounds the difficulties facing insurers still reeling from massive losses inflicted by the terrorist attack on Sept. 11 last year,” John Kollar, ISO’s vice president for consulting and research, remarked. “Low interest rates and the weakness in stock markets year to date suggest that investment results may continue to deteriorate for some time to come.”

Other factors exacerbating the decline in net income included a $0.2-billion loss on miscellaneous noninsurance operations, down from a profit of $0.6 billion in first-quarter 2001. The decline in net income would have been larger if the industry’s federal income taxes had not dropped to $0.2 billion in the first quarter of 2002 from $1.6 billion in the same quarter a year earlier.

Net losses on underwriting declined in first-quarter 2002 because growth in earned premiums exceeded growth in loss and loss-adjustment expenses, other underwriting expenses, and dividends to policyholders. Earned premiums rose $6.2 billion, or 8.1 percent, to $82.9 billion in first-quarter 2002 from $76.7 billion a year earlier. Loss and loss-adjustment expenses increased $2.9 billion, or 4.8 percent, to $63.7 billion in first-quarter 2002 from $60.8 billion in first-quarter 2001. Other underwriting expenses also increased 4.8 percent, rising to $22.6 billion in the first quarter this year from $21.6 billion in the same period last year. Dividends to policyholders fell $51 million, or 12.8 percent, to $351 million in first-quarter 2002 from $402 million in first-quarter 2001.

The underwriting loss in first-quarter 2002 amounts to 4.6 percent of the $82.9 billion in premiums earned during the quarter, down from 7.9 percent of the $76.7 billion in premiums earned during first-quarter 2001. The combined ratio—a key measure of losses and other underwriting expenses per dollar of premium—improved 3.8 percentage points to 102.3 percent in first-quarter 2002 from 106.1 percent in the corresponding quarter of 2001.

The industry’s underwriting results in first-quarter 2002 benefited from low catastrophe losses. According to ISO’s Property Claim Services unit, catastrophe losses fell 9.6 percent to $615 million in first-quarter 2002 from $680 million in first-quarter 2001. At $615 million, first-quarter catastrophe losses were the lowest since 1985, when first-quarter catastrophe losses totaled $558 million. Other loss and loss-adjustment expenses rose 5 percent to $63.1 billion in first-quarter 2002 from $60.1 billion in first-quarter 2001.

The 4.8-percent increase in overall loss and loss-adjustment expenses in first-quarter 2002 compares with a 9.9-percent increase in fourth-quarter 2001 and a 9.3-percent increase in first-quarter 2001. The 4.8-percent increase in other underwriting expenses in first-quarter 2002 compares with a 7.7-percent increase in fourth-quarter 2001 and a 7.4-percent increase in first-quarter 2001. The 12.8-percent decrease in dividends to policyholders in first-quarter 2002 compares with a 15.4-percent decrease in fourth-quarter 2001 and a 19.4-percent decrease in first-quarter 2001.

Industry net written premiums rose $8.4 billion to $90.3 billion in this year’s first-quarter from $81.9 billion in first-quarter 2001. The 10.3 percent year-over-year increase in written premiums in first-quarter 2002 compares with year-over-year-growth rates of 6.2 percent in fourth-quarter 2001 and 11.5 percent first-quarter 2001.

“While the improvement in underwriting results is certainly welcome news, there are some dark clouds on the horizon,” Kollar warned. “Major wildfires continue to threaten some communities in the west, and the hurricane season has just started.

“Insurers also face the prospect of massive additional losses from the terrorist attack on Sept. 11 last year. Estimates for the ultimate cost of the attack range from $30 billion to $70 billion. Using the mid-point of that range and netting out losses covered by foreign insurers, U.S. insurers’ ultimate tab may amount to $25 billion. But ISO’s analysis indicates that, as of year-end 2001, U.S. insurers had only posted about $10 billion of that amount—which means they may still be hit with another $15 billion in losses. Other uncertainties clouding the outlook for the industry include the prospect of losses from future terrorist attacks, increasing numbers of mold claims, and many thousands of unresolved asbestos claims,” Kollar observed.

The industry’s pre-tax operating income—the sum of its gain or loss on underwriting, its net investment income, and other miscellaneous income—rose $1 billion to $4.9 billion in first-quarter 2002 from $3.9 billion in first-quarter 2001.

The industry’s consolidated surplus—its assets minus its liabilities—rose $5.4 billion, or 1.9 percent, to $295.1 billion at March 31, 2002, from $289.6 billion at December 31, 2001. Additions to surplus in the first-quarter included $5.1 billion in net income after taxes, $0.6 billion in unrealized capital gains, $0.5 billion in new funds paid in, and $0.6 billion in other miscellaneous surplus changes. These additions more than offset the $1.3 billion deducted from the surplus to pay dividends to shareholders.

Insurers’ $0.6 billion in unrealized capital gains on investments in first-quarter 2002 compare with $21.1 billion in unrealized capital losses in first-quarter 2001. Combining realized and unrealized capital gains in first-quarter 2002, insurers recorded $0.9 billion in total capital gains—an $18.9-billion swing from the $17.9 billion in total capital losses in the same quarter last year.