They're back.

After an almost catastrophe-free 1997, catastrophes returned with a vengeance in the second quarter of 1998, burdening property/casualty insurance companies that are already contending with the effects of the soft market and fierce competition. And the stormy weather continued with last week's landfall by Hurricane Bonnie.

The catastrophes are unlikely to lead to any long-term price hikes, though, according to Robert M. Steinberg, chairman and chief executive officer of Reliance Insurance Group in New York. "There may have been some hardening in some of the catastrophe property areas, and if Bonnie hits hard, I guess you'll see some more of that, but any time that happens it's only been temporary," he said.

A record $3.4 billion in second-quarter catastrophe losses, as estimated by the Property Claim Services unit of Insurance Services Office Inc., is reflected in insurers' underwriting losses. During the second quarter, PCS logged 16 catastrophes, or events that caused more than $25 million in insured property damage, led by a series of windstorms May 30-June 1 (BI, July 20).

Losses increased 61.8% for the 22 commercial property/casualty insurers surveyed by Business Insurance to $2.06 billion during the first half, compared with the year-earlier period. This compares with a 5.9% increase in first quarter underwriting losses compared with the 1997 quarter (BI, May 25).

"I think for a while in '97, where the economy was so strong and the cat losses were at all-time record lows, that some of the industry sort of forgot about how weak some of the fundamentals are," said John L. Ward of Cincinnati-based Ward Financial Group.

"With the return of the catastrophes, we're back to the reality of dealing with overcapacity, excess capital and soft market prices and that will only make the environment more difficult for companies to operate in profitably and at reasonable pricing levels," he said,

Among other first-half results for the property/casualty companies surveyed:

* Premium volume increased a modest 3.9% to $49.92 billion. This compares with 3.3% growth in the first quarter and 5.5% in all of 1997 (BI, March 23).

* Investment income fell 8.6% to $7.99 billion. This compares with a 14.8% drop in the first quarter and a 17.1% increase in 1997. Excluding Nationwide Mutual's 69.9% drop in investment income, which was related to a special dividend in the first quarter, insurers' investment income increased 5.4% during the half.

* Policyholder surplus among the 20 insurers reporting this data increased 20.2% to $73.88 billion.

* The 19 insurers that reported net income posted just a 0.6% increase for the first half, to $6.6 billion. This compares with the 16.9% increase reported by insurers in the first quarter and last year's 46% increase.

It was a "relatively shabby quarter," Michael Lewis, an analyst with Warburg Dillon Read in New York, said of second-quarter results. There was a combination of weather-related and company-specific problems, he said. "I think that the best way you can put it is some of the inadequate pricing in the commercial property/casualty area is starting to come home to roost," he said.

Mr. Wars, said, though that "While in some ways the comparison of the first six months of '98 to '97 tends to look unfavorable to the industry with regards to most individual companies, we should remember that '97 was one of the best years on record."

"We always knew it would be tough to improve the record results of '97, but the story for the first half of '98 tends to be dominated by most companies being negatively impacted by catastrophe losses," said Mr. Ward.

Furthermore, "for the commercial lines companies, the soft market cycle continues in full force, and in many ways is becoming more competitive," he said. "The one real positive about the six-month results is that investment gains continued very strong."

Mr. Ward added, "When you look at most companies' results for '98, you see a very flat to modest growth in the premium line, which is a reflection of the continued soft market conditions, and generally negative downward trends in the net income line, which is largely a function of the record-setting cats in the second quarter."

"The big story in the first half is nothing's changed in terms of too much capacity chasing too few premium dollars," said Matthew Coyle, a director at rating agency Standard & Poor's Corp. in New York. Mr. Coyle said he anticipates only about 2% in premium growth for the industry this year, which would actually be a decline after inflation is taken into account.

In addition to lower prices, "you also have expanded coverage, broader terms, higher retentions, and all these things are occurring for companies trying to compete," said Mr. Coyle.

One insurer sees the conditions setting the stage for some firmer pricing.

Rick Quagliaroli, president of the commercial insurance operations at The Hartford Financial Services Group Inc., said, "We're seeing some definite changes in terms of market receptivity to (higher) pricing," particularly in the middle-market area.

"Depending on what an individual company's mix of business activity is, that kind of price movement may not be sufficient to improve their financial performance, but in our case it's a real plus for us," said Mr. Quagliaroli.

But others see the pricing outlook as unchanged.

"We really haven't seen much change at all in the marketplace as far as pricing is concerned," said George P. Yonker, vp-finance for SAFECO Corp. in Seattle.

"There isn't anything that suggests a turnaround in commercial lines. We've been talking about this since the mid-80s," but the industry remains overcapitalized, with "too much money chasing too little business," said Mr. Yonker.

"I see pricing remaining difficult and competition intensifying. It's hard to predict how cats will roll out, but I think it's reasonable to expect that they'll be impacting results for the rest of the year," said Mr. Ward.

Although it is hard to say where the next problems will crop up, "the industry is going to continue to be faced with shortfalls in the numbers. . .almost every quarter going forward until there's a change in the pricing mechanism," said Mr. Lewis of Warburg, Dillon Read.

"You're going to find companies that have problems outside the straight weather-related area. It's harder and harder to sustain decent earnings growth in the face of the increasingly soft pricing environment," he said.

"Until you take some capital out, or until the results worsen even further, I don't see any change in the standard commercial lines overall," Mr. Lewis said. This will encourage further merger and acquisition activity, he said.

"If you can't grow the business, there's more and more of a tendency to buy production, and that should obviously continue," he said. "We would look for ongoing industry consolidation."

A declining stock market could turn things around, said S&P's Mr. Coyle.

"Right now capital in the industry is immensely supported by burgeoning stock market portfolios" and their unrealized capital gains, he said.

"I think what's happening is the overcapacity is allowing insurers to finance their business with surplus, or at least justify maintaining that business," said Mr. Coyle.

This allows insurers to not only stay in the insurance market, but also make acquisitions and go to the debt markets more often and more cheaply, he said. It also permits insurers to pursue business that "in another time period, when capital wasn't so strong, they may not have."

But a devaluation of the stock market, he said, may have an impact on pricing by reducing this overcapacity.

Mr. Steinberg agreed this is a possibility. A decline in the value of insurers' investment portfolios will not only drive capital out of the business, but also "may make companies refocus on what their primary purpose is, and that's make an underwriting profit, or as close to it as possible."

Mr. Steinberg also pointed to declines in insurers' stock prices in recent weeks. "I am hopeful that as the equity prices of the property/casualty insurance companies come down, that maybe it's a wakeup call for some of the chief executives to not let pricing continue to drop. Wall Street's not going to accept that.'