Robert P. Hartwig, senior vice president and chief economist for the Insurance Information Institute in New York, in a statement, called the results "good, bad and ugly."

"The good news is that the U.S. property-casualty insurance industry earned $4.6 billion in net income after taxes during the first half of 2002," he said. "That's also the bad news. Although $4.6 billion is a lot better than the $2.8 billion earned during the same period last year?it is, amazingly, $700 million less than the $5.3 billion earned during the first quarter of this year."

As for the "ugly" news, he said, "The industry's 3.3 percent statutory rate of return through the first half of this year is barely one-fourth of the industry's 12 percent cost of capital"?the rate of return needed by the industry to be able to retain and attract capital over the long-run.

The report said the industry's net loss on underwriting decreased 38.8 percent in first-half 2002 to $11.9 billion from $19.4 billion in first-half 2001, with acceleration in premium growth and lower catastrophe losses contributing to the improvement in underwriting results.

Surplus declined in first-half 2002 largely because of $8.6 billion in unrealized capital losses on investments as a result of declines in stock markets. Those unrealized losses more than offset additions to surplus, including the industry's $4.6 billion in net income, according to ISO and NAII.

The truly positive news, Mr. Hartwig said, is that net written premium growth accelerated to 12 percent during the first half compared to 9.9 percent a year ago. He noted this is tempered by the fact that investment gains (which consist of investment income and realized investment gains-losses) fell by 28.3 percent.

Similarly, he said, excitement over the drop in the combined ratio to 105 during the first half of this year from 111.1 last year is accompanied by concern over the $6.7 billion drop in capacity since year-end to $282.9 billion.

The 12-percent increase in written premiums in the first half of 2002 is the largest first-half increase in premiums since 1987, when premiums rose 13 percent versus year-ago levels, the report said.

John J. Kollar, ISO vice president for consulting and research, observed that, all else being equal, "one would expect premiums to grow in proportion to the economy. But, with just one exception, premium growth fell short of economic growth every year from 1988 to 2000 as a result of softening in insurance markets."

Mr. Kollar added that, since then, insurance markets have been firming, "and the spread between premium growth and GDP growth widened from 6.8 percentage points in first-half 2001 to 9 percentage points in first-half 2002."

The figures are consolidated estimates for the entire industry based on the reports of insurers that account for 96 percent of the U.S. p-c insurance business.

Catastrophe losses fell to $3 billion in first-half 2002 from $6.9 billion in first-half 2001, according to ISO's Property Claim Services unit. At $3 billion, catastrophe losses through six months had fallen to their lowest level since first-half 1997, when there were just $1.8 billion in catastrophe losses.

Overall loss and loss-adjustment expenses increased 3.9 percent to $134.3 billion in first-half 2002 from $129.3 billion in first-half 2001, as non-catastrophe loss and loss-adjustment expenses rose 7.3 percent to $131.3 billion in first-half 2002 from $122.4 billion a year earlier.

According to ISO's PCS, other underwriting expenses?primarily acquisition expenses, other expenses associated with the underwriting process, pricing and servicing insurance policies, and premium taxes?rose 7 percent to $45.9 billion in the first half of this year from $42.9 billion in the first half of last year.

Dividends to policyholders decreased 16.2 percent to $618 million in first-half 2002 from $738 million in first-half 2001.

The underwriting loss in first-half 2002 amounts to 7 percent of the $169 billion in premiums earned during the period, down from 12.7 percent of the $153.5 billion in premiums earned during the comparable period last year.

Don Griffin, NAII assistant vice president for business and personal lines, said the decline in catastrophe losses accounted for 1.7 percentage points of the 6 percentage point improvement in the industry's combined ratio for first-half 2002.

"The bulk of the improvement in the industry's combined ratio?4.3 percentage points?reflects the excess of growth in premiums over growth in non-catastrophe losses and other expenses.," he said.

Reflecting the improvement in underwriting results, the industry's net income after taxes rose despite a decline in insurers' investment income and realized capital losses on investments.

Net investment income?primarily dividends earned from stocks and interest on bonds?declined 4.9 percent to $17.8 billion in first-half 2002 from $18.7 billion in first-half 2001. Insurers realized $564 million in capital losses on investments in first-half 2002, in contrast to the $5.3 billion in gains on investments realized in the first half of last year.

Combining net investment income and realized capital losses in first-half 2002, the industry's net investment gain amounted to $17.3 billion, down 28.3 percent from $24.1 billion in first-half 2001.

"The 4.9-percent decrease in investment income in first-half 2002 versus year-ago levels reflects a decline in the yield on investments," noted Mr. Kollar. "Insurers' average holdings of cash and invested assets during the first half of 2002 were 1.2 percent above their average holdings of cash and invested assets in the first half of 2001, but the annualized yield on cash and invested assets fell 6 percent."

He noted that with the average yield on 10-year Treasury notes having fallen from 4.93 percent in June to 4.26 percent in August, "and with pressure on the Federal Reserve Board to keep interest rates low to bolster a sagging economy and weak stock markets, low yields are apt to impede the growth of investment income going forward."

The industry earned $28 million in income from other miscellaneous operations in the first half of this year, in contrast to losing $763 million on such operations in first-half 2001. Pre-tax operating income?the sum of gains or losses on underwriting, net investment income, and other miscellaneous income?rose to positive $6 billion in first-half 2002 from negative $1.5 billion in first-half 2001.

Also contributing to the increase in net income after taxes, the industry's federal income taxes fell 29.8 percent to $752 million for the first-half 2002 from $1.1 billion a year ago.

The $6.7 billion decline in the industry's consolidated surplus?its assets minus its liabilities?in first-half 2002 compares with a $19.2 billon decline in first-half 2001. The $6.7 billion decline in surplus reflects the excess of $8.6 billion in unrealized capital losses on investments, $3.3 billion in dividends to shareholders, and $1 billion in miscellaneous charges against surplus over $4.6 billion in net income after taxes and $1.5 billion in new funds paid in.

The $8.6 billion in unrealized capital losses on investment in first-half 2002 is down $10.2 billion from $18.8 billion in unrealized capital losses in first-half 2001.

The $3.3 billion in dividends to shareholders is down $3.3 billion from $6.6 billion in the first half of last year.

The $1 billion in miscellaneous charges against surplus contrasts with $2.3 billion in miscellaneous additions to surplus in the first half of 2001.

The $4.6 billion in net income after taxes is up $1.9 billion from $2.8 billion during the first six months of 2001.

The $1.5 billion in new funds paid in compares with $1.1 billion in the first half of 2001.

Combining realized and unrealized capital losses, insurers suffered $9.2 billion in overall capital losses on investments in first-half 2002?an improvement from $13.5 billion in overall capital losses in first-half 2001.

"While the increase in first-half net income is welcome news, the industry's recovery since last year's terrorist attack has been hampered by adverse developments in financial markets," commented NAII's Mr. Griffin.

"The decline in surplus in first-half 2002 reflects capital losses on investments attributable to the tremendous weakness in stock markets during the period as exemplified by the 13.8 percent decline in the S&P 500 through the end of June," said Mr. Griffin.

He continued that given that the S&P 500 dropped a further 15.8 percent from the end of June through Sept. 23, "and the uncertain outlook for stock markets, capital losses on investments may continue to eat into insurers' surplus for some time to come."