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̽»¨¾«Ñ¡

2001 - First Nine Months Results

SPONSORED BY

Robert P. Hartwig, Ph.D.
Vice President & Chief Economist
̽»¨¾«Ñ¡ Information Institute
bobh@iii.org

December 19, 2001

The property/casualty insurance industry reported a statutory rate of return of negative 1.5 percent (on an annualized basis) for the first nine months of 2001, down from 6.9 percent for the first nine months of last year and substantially below the 6.3 percent return for the year 2000.Ìý The results were released by the ̽»¨¾«Ñ¡ Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

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From Ground Zero to Below Zero?

The industry’s poor financial performance through the first nine months of 2001 will come as no surprise to industry observers and could well portend a negative rate of return for the year as a whole.Ìý As noted in the ISO release, this would be a first-ever occurrence.Ìý As bad as the results are—the 9-month industry combined ratio was 114.5 and the third-quarter ratio was 121.1—they reflect only part of the financial damage inflicted by the September 11 terrorist attacks.Ìý Indeed, a recent ̽»¨¾«Ñ¡ Information Institute of industry analysts indicated a consensus 2002 combined ratio estimate of 118.6—the highest on record.Ìý On a calendar-period basis, the impact of the September 11 attacks will continue to be felt on insurer income statements for several quarters to come for a variety of reasons:

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  • The September 11 terrorist attacks occurred just 19 days before the end of the third quarter.Ìý The sheer enormity of the event, the impossibility of adjusting tens of thousands of claims in such a short period of time (much of the area remained cordoned-off for weeks), uncertainty over the actual number of victims and the impact across such a broad range of insurance lines means that most insurers could not possibly complete a full assessment of their liabilities by the time the books were closed on the third quarter.
  • As noted by ISO, U.S. insurers had posted only about $10 billion in net losses by the end of the third quarter.Ìý The midpoint of 19 independent estimates of the insured losses stemming from the September 11 attacks is about $40 billion (excluding approximately $3 billion in life insurance losses) and the range of estimates is $30 billion to $70 billion.

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  • More than half of the 100-plus insurers and reinsurers worldwide with September 11 liabilities revised their loss estimates upwards after September 30.Ìý Such revisions are likely to continue in 2002.
  • The losses sustained by the insurance industry were unprecedented in virtually every respect, producing catastrophic losses not only in property coverages, but also for the first time in workers compensation and certain specialty lines such as event cancellation.Ìý Business interruption claims are estimated to be as muchÌýÌý as $10 billion.Ìý Aviation and liability insurers also suffered their worst-ever losses stemming from a single event.

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  • The legal and liability issues arising from the attacks are certain to require many years to resolve and are the single largest source of uncertainty in the insured loss estimates stemming from the events of September 11, ranging in cost from $5 billion to $20 billion.Ìý The large but changing estimates of the number of people killed or injured (the official estimate of the number of people killed at the World Trade Center site has changed more than 40 times since September 11), combined with the uncertain impact of the government-backed victims’ compensation fund and subsequent legislation limiting the liability of some parties (but not that of others) makes estimating total liability costs nearly impossible so soon after the event. Moreover, trial lawyers will at some point lift their self-imposed moratorium on lawsuits, potentially opening the floodgates to a wide range of suits.

    • The 114.5 calendar period combined ratio through the first nine months of 2001 is significantly lower than analysts’ projections for the reasons mentioned above (full results from the I.I.I.’s Earlybird survey are available at www.iii.org/media/industry/financials/forecast2002).Ìý In order to reconcile the 9-month figure of 114.5 with the consensus estimate of 118.6, the implied fourth quarter combined ratio is 130.9.Ìý A combined ratio of that magnitude for the fourth quarter is unlikely, meaning that the balance of losses will spill over into the calendar-year results for 2002 (and beyond).Ìý In situations such as this, the combined ratio on an accident year basis is a better estimate of actual underwriting performance.Ìý An accident year 2001 combined ratio in the vicinity of 125 would not be unreasonable.

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    Premium Growth

    Widespread commercial insurance rate increases have gained headlines since September 11.Ìý Anecdotes detailing increases in the 100-plus percent range are common. As noted in the ISO release, however, written premium growth through the first nine months was just 8.8 percent.Ìý During the third quarter, premium growth was just 6.5 percent.Ìý Clearly, very little of the post-September 11 rate increases had been written by September 30.Ìý Most of the increase in premiums written will be recorded in 2002 and earned in late 2002 and into 2003—and will be nowhere near the triple-digit figures so commonly cited in the media.Ìý Analysts estimate that net premiums written growth in 2001 and 2002 at 10.3 percent and 15.1 percent, respectively.

    The poor results of 2001 clearly indicate that rate increases are both necessary and justified in the current underwriting environment.

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    Surplus: Industry Capacity Continues to Shrink

    The $35.5 billion decrease in surplus from $317.4 billion on December 31, 2000 to $281.9 billion as of September 30 represents a decline of 11.2 percent.Ìý Surplus is down 16.9 percent since peaking at $339.3 billion in June 1999.Ìý The decrease in the industry’s capacity (as measured by surplus), combined with heightened risk, strong demand and a return to more rational pricing are the major drivers of the current hard market.Ìý Capacity has now shrunk to less than what it was at year-end 1997.

    A detailed industry income statement for the first nine months ofÌý 2001 follows:

    First Nine Months of 2001 Financial Results*

    First Nine Months of 2001 Financial Results*

    ($ billions)

    Ìý $
    Earned Premiums 233.1
    Incurred Losses (Including loss adjustment expenses) 205.2
    Expenses 64.3
    Policyholder Dividends 1.1
    Net Underwriting Losses -37.5
    Investment Income 27.5
    Other Items 0
    Operating Gain -10
    Realized Capital Gains 6.9
    Pre-tax Income -3.1
    Taxes 0.1
    Net After-Tax Income -3.1
    Surplus (End of Period) 281.9
    Combined Ratio 114.5

    *Figures may not add to totals due to rounding. Calculations in text based on unrounded figures.

    Sources: ̽»¨¾«Ñ¡ Services Office, National Association of Independent Insurers and the ̽»¨¾«Ñ¡ Information Institute.

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