NEW YORK (Bloomberg) — Record tornado damages, the weakening economy and a drop in premiums may reduce insurers' earnings by 30 percent, the steepest second-quarter decline since 2002.

The industry's slump in profits is worse than all 24 groups in the Standard & Poor's 500 Index except for banks, financial-services firms and automobile companies, analysts surveyed by Bloomberg said. Sixteen of 20 insurers in the S&P 500, led by American International Group Inc. and Allstate Corp., may report lower net income or a loss.

Losses from catastrophes, including the most tornadoes in the US since at least 1950, were about $5.5 billion. At the same time, investment returns and opportunities to sell residential and corporate coverage declined as the economy slowed and home sales dropped.

"We're going to see amazingly bad numbers from the property insurers in the second quarter," said Meyer Shields, an analyst at Stifel Nicolaus & Co. in Baltimore. "There are lots and lots of losses out there."

The estimated decline in profit, the most since earnings per share fell about 45 percent in 2002, may be driven by tornado losses at insurers such as Allstate, lower investment returns for companies like AIG and falling rates at commercial insurers including Travelers Cos., said Paul Newsome, an analyst at Sandler O'Neill & Partners in Chicago.

"You rarely get all three of those factors at once," Newsome said.

Second-quarter results typically include fewer catastrophe costs than the third and fourth quarters, when the Atlantic hurricane season peaks, he said. Researchers at Colorado State University and AccuWeather.com predict an above average number of hurricanes will form this year, driven in part by higher ocean temperatures.

Allstate, the largest publicly traded US home and auto insurer, may report profit of $1.35 a share, down 23 percent from a year earlier, according to the average estimate of 20 analysts surveyed by Bloomberg. The insurer, based in Northbrook, Illinois, will report results on July 23.

"I'm kind of crossing my fingers for Allstate," said Jim Ryan, an insurance analyst at Morningstar Inc. in Chicago. "They haven't said anything to give us a hint about what their catastrophe losses might be."

Hartford Financial Services Group Inc., the insurer based in the Connecticut city of the same name, said yesterday in an e-mailed statement that it had $171 million of costs from natural disasters in the second quarter. That compares to $177 million in all of 2007.

Cincinnati Financial Corp. and Harleysville Group Inc. of Harleysville, Pennsylvania, said catastrophe costs more than doubled in the quarter as an estimated 1,164 tornadoes struck the US, hitting towns from Colorado to Minnesota to Texas and killing 49 people, including four boys at an Iowa scout camp in June.

In last year's second quarter, industry-wide catastrophe costs were 60 percent less, according to Insurance Services Office Inc. in Jersey City, New Jersey.

As the US economy slowed in the second quarter, foreclosures reached new peaks. Insurers, including Allstate, drop coverage when policyholders lose their houses and also have fewer opportunities to attract new clients. New home sales will fall 26 percent this year to 573,000, New York-based Fitch Ratings estimated on July 11.

"This seems to be the worst housing market I've ever seen," said George Ruebenson, the president of Allstate's home and auto unit, in a May 29 interview. "Our ability to expand the homeowners business for Allstate is severely limited by this economy."

Expenses also may rise as the economy sours, said Bill King, senior executive vice-president at State Farm Mutual Automobile Insurance Co., the No.1 home insurer.

"The slowing of the economy could put people in more desperate financial situations that might cause a difference in claim behaviour," King said.

When the economy slows, policyholders are more likely to reduce the amount of coverage they buy, resort to fraud or submit claims for smaller-than-usual losses, he said. State Farm of Bloomington, Illinois, is owned by its policyholders and has no publicly traded debt.

Analysts' estimates may understate the industry's decline in net income because their predictions don't account for the falling value of securities tied to home loans. Insurers have written down more than $77 billion of holdings since last year, including mortgage-backed assets, equity investments tied to the housing market and contracts that protect fixed-income investors, according to data compiled by Bloomberg.

Insurers may lower the value of the assets further as they announce second-quarter results, said Shields of Stifel Nicolaus.

Investment losses helped push down stock prices, with every insurer in the S&P 500 Insurance Index declining this year except Seattle-based Safeco Corp., which agreed in April to be purchased by Liberty Mutual Group Inc. of Boston.

AIG, the world's largest insurer by assets, has written down more than $39 billion, more than any other company in the insurance business and smaller only than Citigroup Inc. in the financial industry, Bloomberg data show. The New York-based insurer has dropped about 60 percent this year through yesterday.

AIG and business insurers including Travelers of St. Paul, Minnesota, and Warren, New Jersey-based Chubb Corp. are charging less for commercial coverage in an attempt to win market share. Prices for such coverage fell 11 percent in the U.S. during June from a year earlier, according to MarketScout, the Dallas-based electronic insurance exchange. Prices have fallen for 40 consecutive months, MarketScout reported.

Rates will continue to fall and US property and casualty insurers may pay more in claims and expenses than they collect in premiums by the time 2008 is over, Fitch Ratings said last month.

"You usually see large catastrophe losses in the third quarter when the hurricanes hit," said Morningstar's Ryan. "I think it only gets worse from here."