But while lower first-quarter underwriting losses translated into a combined ratio improvement of 3.8 points over last years first quarter, net investment income dropped 5.5 percent to $8.9 billion and realized capital gains plummeted 88.8 percent to $400 million, compared with $3.2 billion in first-quarter 2001.

Combining underwriting and investment results, Mr. Hartwig said the industrys first-quarter statutory rate of return was 6.9 percent, down from 7.4 percent for first-quarter 2001. With investment returns likely to continue to mar improvements from higher prices and tighter underwriting standards, even combined ratios near the first quarters 102.3 figure would still be too high to get to Fortune 500-type rates of return, Mr. Hartwig said. Such double-digit returns could only be achieved if the p-c industrys combined ratio comes down to the 95-to-97 range, he estimated.

Matt Mosher, group vice president, property-casualty for A.M. Best in Oldwick, N.J., said 102.3 was a little better than expected for the first quarter, adding that the growth in net premiums for primary insurers was also much higher than expected for both personal and commercial lines. He noted that the rating agency had forecast 7.5 percent growth in personal lines for 2002 earlier this year, and that the rate came in at 9 percent for the quarter.

Comparable expected and actual growth rates in commercial lines were 12.5 and 18 percent, respectively, he said, noting that while “we may see some slippage” for the remainder of the year, the rating agency might be looking to revise its predictions in light of those positive first-quarter surprises.

On the investment side, however, the negative news was building quickly. The ISO/NAII first-quarter results were released on a day that saw equity markets reeling from the aftereffects of news from WorldCom, which announced that it would restate its 2001 earnings by $3.1 billion and first-quarter 2002 earnings by another $800 million.

“There is exposure to WorldCom for insurers, principally on the investment side,” Mr. Hartwig said, adding that unlike the Enron situation, he did not believe there was any exposure to surety losses. While there will be directors and officers liability loss exposure for some insurers as well, “there are [coverage] issues with respect to the most egregious violations of public trust,” he said. “There is at least the appearance of wrongdoing,” he added, noting that if an insurer can show that an insured deliberately misrepresented itself, that would be grounds for suspending or deferring D&O claims payments.

WorldCom is a widely-held company with institutional shareholders among its investors, he said, noting that insurers rank as the fourth-largest group of institutional investors. Exposure for these investors exists on the equity side (where the stock value has collapsed from $65 a few years ago to below $1 last week before trading was halted), and on the debt side, he said, explaining that WorldCom used debt to finance acquisitions.

While several European life insurers have announced their holdings in such securities, among U.S. p-c insurers, only Travelers Property-Casualty had publicly-disclosed $83.4 million of debt on its books as this article went to press.

Mr. Mosher, who said that A.M. Best is in the process of identifying individual U.S. insurer investments, distinguished between the direct and indirect impact of WorldCom on the industry. While he said he believed that the actual investments in the company would not have an impact on the industrys overall capitalization, the indirect impact of further market declines could depress industry capital in the second quarter.

“Any individual insurer's exposure to WorldCom is going to be small relative to its total asset base,” said Mr. Hartwig, adding that he didnt believe that WorldCom investments posed a threat to the solvency of any insurer. Still, “no amount of investment acumen can offset whats happened in the equity markets,” he said. “Enron was the tip of the iceberg. The 89 percent decline in capital gains is directly the result of the crisis in corporate governance.”

Large institutional investors have broadly diversified portfolios and conservative investment strategies, but the values of those portfolios have all fallen anyway, he said. “For the first time since the Great Depression, were seeing the third straight year of losses in the stock market–and those were arguably some of the darkest days in the United States markets,” he said.

“Symmetrical idiocy” was the term that Chris Weihs, vice president of Swiss Re Asset Management, applied to the period that the stock market is in. Explaining the term during the companys Mid-Year Economic and Insurance Industry teleconference last week, he said it appears the market is becoming “as irrational on the downside as it was on the upside toward the end of 1999 and into 2000.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 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.