With two catastrophes producing insured losses over $1 billion, and seven more contributing to a $4.4 billion total, second-quarter 2001 was the second-worst second quarter in a decade, according to the Property Claims Services unit of Jersey City, N.J.-based Insurance Services Office, Inc.

But when individual company results were officially announced for the quarter, the expected refrain--"Except for catastrophe losses, our results were profitable"--was replaced by a variety of unusual statements.

In addition to the effects of Tropical Storm Allison, executives at Allstate and Chubb said adverse trends in the homeowners line lowered their numbers when they announced their second-quarter earnings for 2001.

Except for their reinsurance business, results were solid, said Ramani Ayer, chairman and chief executive officer of The Hartford.

At The St. Paul, it was healthcare liability claims that intruded on otherwise glowing results, according to Chairman and CEO Douglas Leatherdale.

American Financial Group is still struggling to get ahead of personal auto loss costs by increasing rates, according to Carl Lindner III, co-president. The company is also planning to review its asbestos and environmental exposure, the Cincinnati-based company said.

At CNA, there were reserve charges for asbestos claims, environmental claims and other mass tort claims totaling some $800 million after taxes. CNA also had reserve charges for construction defect losses, reinsurance, nursing home chains and a host of other lines. All these non-A&E charges, totaling $900 million after taxes, related to policies written in recent prior years, CNA said.

Even business that didnt need the fix of extra loss reserves produced charges for CNA that reduced second-quarter earnings further. For certain retrospectively-rated accounts, the insurer explained, lower-than-expected losses will mean that anticipated additional premiums wont materialize--creating the need for an additional $400 million charge.

"Youre going to add four points to the industry combined ratio for the quarter," Jay Cohen, an insurance analyst and first vice president for Merrill Lynch in New York, advised CNA executives during a CNA earnings conference. His observation foreshadows the possibility that an "except for CNA" footnote will show up on industry aggregate results charts when such numbers are released.

Among the 26 insurers tracked by National Underwriter for the second quarter, most showed better combined ratios in second-quarter 2001 than in 2000. But for the nine of 10 insurers whose deteriorating underwriting results pushed operating earnings downward, earnings didnt simply fall--they plummeted.

Among them were Northbrook, Ill.-based Allstate, which reported nearly a 50 percent decline in operating earnings; Seattle-based SAFECO, where earnings fell more than 400 percent; and CNA, with a percentage drop in earnings consisting of four digits--1,447 percent.

"We, as analysts, were disappointed by the operating issues that emerged in the second quarter"--by the number of companies that announced them and by the fact the announcements "came this late into the hardening market," said Michael Lewis, head of insurance research at UBS Warburg in New York. For the industry, top-line premium growth is still not resulting in bottom-line earnings growth, he said.

Focusing on homeowners issues discussed by Allstate, Chubb, SAFECO and others, Mr. Lewis said analysts had already known that rates were inadequate. "But I was taken aback by the magnitude of the problem and that it intensified so quickly when we got beyond weather-related claims," he added.

Calling some impacts of the diverse operating issues that individual insurers announced "eye-popping," he said, "I am hard-pressed, as you are, to see why everything came together at mid-year," noting that some of the issues--the reserve issues, in particular--more typically emerge in year-end announcements.

Merrill Lynchs Mr. Cohen boiled the earnings issues down to two--claims inflation and loss reserves.

"In areas like homeowners, property values and repair costs have been steadily going up. But the industry had been seeing this before. Those companies that seemed immune--that had not seen much impact of these issues in the past--saw these [trends] become more of an issue in the second quarter," he said. "Im not sure why."

With respect to loss reserves, he said that in addition to putting up reserves, many companies "were unable or unwilling to release reserves in the second quarter," citing Allstate and St. Paul as examples.

"We were not terrifically surprised that CNAs reserves were short," he said, noting that Merrill Lynch had estimated a shortfall in a May reserve study that the firm published. "As to why they chose to address their asbestos issue now--I dont have a great answer," he said.

"When companies decide to look at asbestos depends on the management team," said Alain Karaoglan, equity research analyst at Deutsche Banc Alex. Brown in New York. He noted, for example, that Allstate undertakes a reserve review every third quarter.

Rejecting the possibility that some companies engaged in cleanup activities in the first half of 2001 to meet past promises of improved earnings by year-end, Mr. Cohen said, "At some point, you have to recognize the claims."

And according to officials at CNA and American Financial, there were more claims to recognize during the quarter.

During recent conference calls, the companies described the emergence of non-product claims, claims being submitted on behalf of individuals with no illnesses, and increased numbers of secondary manufacturing claims. Such trends had previously been described in industry studies by Tillinghast-Towers Perrin and A.M. Best. (See NU, Oct. 16, 2000, page 1; Nov. 13, 2000, page 6; June 4, 2001, page 2; and July 16, 2001, page S-20.)

"Why now? Weve decided to step up reserves now for two basic reasons," said CNA Chairman and CEO Bernie Hengesbaugh during CNAs earnings conference call. "First of all, with regard to asbestos, we definitely did not want to fall into pay-as-you-go mode with all of the uncertainty that that implies. Secondly, these actions announced today, with our continuing focus on underwriting excellence and expense reduction, [are] going to enable CNA to derive improved operating performance--and position us very well going forward."

CNAs actions, however, support concerns for the industry as a whole, say analysts like those at Fitch in Chicago. In a recent statement, Fitch analysts said they are concerned not just with the asbestos reserve actions, but equally with the charges on business written in recent years. The statement also announced the rating agencys intention to review ratings of all p-c insurers and reinsurers with material commercial lines exposures over the next several weeks.

For the industry, "deficiencies in recent accident years call into question the adequacy of commercial lines premium rates in 2000 and 2001," Fitch said. In spite of double-digit premium increases, earnings "will actually be lower than levels currently being reported by many insurers," Fitch said.

"We are discouraged and disappointed," said UBS Warburgs Mr. Lewis. "Certainly many of the individual problems of the second quarter are going to create an ongoing dampening effect on industry earnings" for the year.

More and more individual companies will have issues, he said, and analysts "will continue to talk about separation between losers and winners--those that addressed problems earlier, those that exercised more disciplined underwriting practices in 1998 and 1999," he said.

"Even saying that, we as analysts are going to be hard-pressed to do anything but lower earnings estimates for the remainder of 2001," he added.

Mr. Karaoglan still expects the promise of improved results by year-end 2001 to be achieved by many insurers. But as to how much they will improve, "we will have to ratchet down our expectations," he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 20, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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