AAI Says P&C First-Half Results Could be Better

September 25, 2002

The six-month profit increase earned by property & casualty insurers reported recently by A.M. Best Co. is a step in the right direction, but conditions in the industry aren’t as rosy as such improved financials might lead many to think, according to the Alliance of American Insurers (AAI).

“Although increased premiums and a reduced combined ratio resulted in net income rising 82 percent to $4.7 billion in the first half of this year, the large percentage increase is misleading because profits were so small in 2001, Rodger Lawson, president of the Alliance of American Insurers, said.

“Last year’s first-half profit amounted to only 1.6 percent of premium and a very low rate of return of only 1.8 percent on an annualized basis. By comparison, 2002’s profit equates to 2.3 percent of premium and an annualized rate of return of only 3.3 percent – still a very poor result historically.”

The industry’s financials also contain several important negatives, Roger Kenney, associate vice president of research for the Alliance, commented. “Almost half of the improvement in the combined ratio is due to fewer catastrophe losses in the first six months of 2002. Had the catastrophe losses been the same as last year, net income would have been less in 2002 than in 2001,” he said.

“Investment income continues to lag previous levels, Kenney added. “For the first six months of 2002 income from interest and dividends is down $800 million. In addition, capital gains were a negative $500 million as of June 2002, compared to a positive $5.3 billion in 2001, almost a $6 billion swing.

“But of most concern is that, despite improving net income, surplus declined in the second quarter of 2002 compared to a small gain in first quarter and is now 2.1 percent lower than it was at year end 2001. The decline is caused by unrealized capital losses, which affect surplus but are not part of income. At $284 billion, surplus is as low now as it has been in six years and is moving lower.

Lawson noted that the industry’s latest financial results “underline the fact that the need for a federal backstop is ever more urgent. The losses from another terrorist attack on the U.S. currently would fall entirely on the domestic insurance industry given that reinsurers have excluded coverage for terrorism losses.

“While the industry surplus is $284 billion, less that half that ($118 billion as of Dec. 31, 2001) is held by commercial insurers who would suffer the brunt of any future surplus losses. Being hit by another terrorist attack of a magnitude similar to the Sept. 11, 2001 event would severely impact their surplus, seriously undermining the industry’s ability to write anywhere near their current level of premium.”

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