With both firms anticipating an abundance of “kitchen-sink” charges in the fourth quarter, Best analysts figured on a $9 billion net loss for the p-c industry (a 144 percent income drop from 2000), while Fitch forecasted a $6 billion net loss (a 128 percent decline).

Among a small sample of 32 publicly-traded companies tracked by National Underwriter, 23 insurers explicitly disclosed charges to boost loss reserves, restructure businesses, pay potential Enron losses and cover guaranty fund assessments in the fourth quarter. For the same group, 10 companies had charges to report in the third quarter.

(See related story on page 26 for fourth-quarter charges. See NU, Dec. 10, 2001, page 6, for third-quarter charges.)

A comparison of fourth-quarter net income for these 32 companies with third-quarter net income (excluding Sept. 11 losses) reveals that half of these companies reported worse results in the more recent quarter.

While companies like American Financial, American International Group and SAFECO reported more favorable results in the fourth quarter, net income for the year still fell more than 40 percent for the entire 32-member group, with 14 reporting red ink on the bottom line for all of 2001.

Excluding Sept. 11 losses, the group's full-year income drop was roughly 25 percent in 2001, according to NU calculations–roughly the same drop reported for the group through nine months.

Notably, however, the calculations exclude the results for non-public companies, including the nations largest–State Farm. The Bloomington, Ill.-based carrier, which was not heavily impacted by Sept. 11 losses, reported one of the worst results for 2001–a staggering $5 billion loss.

State Farms “reported auto and homeowners results were weak” compared to the industry, and their losses were higher than Standard & Poor's expected, said Charles Titterton, a director for S&P in New York. He attributed the company's poorer performance to an “aggressive philosophy of competing on price,” which management has adhered to for several years.

“They are trying to maintain some very considerable strengths,” including spread of risk, market share and capitalization, he said. While aggressive pricing worked against the last objective, pushing net worth down $5.7 billion, the group is still extremely well capitalized, with levels far above those required for a “triple-A” rating, Mr. Titterton noted.

Within days of State Farms earnings announcement, however, the decline in operating results and the possibility that rate increases won't be enough to cover underwriting losses in 2002 prompted S&P to place the “triple-A” financial strength rating of most of State Farm's operating companies on “CreditWatch, with negative indications.”

The announcement “almost defines CreditWatch,” Mr. Titterton said, noting that the prospects for a downgrade to “double-A” are “very good,” and that resolution is expected “very quickly.”

If it is downgraded, State Farm will join a growing list of household names, such as Liberty Mutual and Fireman's Fund, whose ratings were slashed by one or more rating firms because of weak results in recent months.

For less well-capitalized insurers, painful struggles with underwriting losses, even without the impact of Sept. 11, became insurmountable, forcing them to deal with more than downgrades once their 2001 figures were tallied.

“This quarter, GAINSCO took significant actions to reduce its exposure to the insurance industry,” Glenn Anderson, president and chief executive officer of the Fort Worth, Texas-based carrier, said during a somber conference call. Mr. Anderson was referring to a decision by the longtime commercial lines insurer to shed its volatile $70 million commercial book in favor of a “very unprofitable” $40 million nonstandard personal auto book, on the strength of some “good actuarial leading indications.”

With its stock trading below 25 cents and a market capitalization of only $6 million in early March, the company also said it was at risk of losing its listing on the New York Stock Exchange.

GAINSCO was one of many insurers that decided to throw in the towel on a portion (or all) of its insurance business recently.

Pasadena, Calif.-based PAULA Financial announced that its workers compensation insurer, PAULA Insurance, would voluntarily cease underwriting, effective immediately.

Two medical malpractice insurers–The MIIX Group in Lawrenceville, N.J., and SCPIE Holdings in Los Angeles–each said they would focus on physicians business in their regions, shedding non-core business from other areas.

All three announced significant charges to boost reserves (PAULA, $37 million; MIIX, $64.5 million; and SCPIE, $56 million on a direct basis.)

But there are still some insurers that haven't faced their problems–or taken the charges they need to, according to William R. Berkley, chairman and CEO of W.R. Berkley Corp. in Greenwich, Conn.

Referencing the decision of Overseas Partners Ltd. in Bermuda “to effectively get out” of the p-c reinsurance business, he said during an earnings conference call that “there are lots of people that have very significant problems.”

He also said that many companies (reinsurers, in particular) “have been constrained” in their ability to take charges “by rating agency concerns or aggregate capital concerns,” or by delays in information from primary insurers, which might be similarly constrained.

“I think there will be many companies that have failed to examine their futures as candidly as we have,” he said.

With $12 million in Enron losses and $21.3 million in after-tax reserve charges, Berkley's charges rank low on a list that goes as high as $570 million for Berkshire-Hathaway's General Re.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 1, 2002. Copyright 2002 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.