P/C Industry Posts $1.3B Loss in Q1; Combined Ratio Up to 102.2

The property/casualty insurance industry suffered a $1.3 billion net loss after taxes for first-quarter 2009, which constitutes a $9.8 billion adverse swing from the industry’s $8.5 billion in net income after taxes in first-quarter 2008. And reflecting the swing to a net loss after taxes, the insurance industry’s annualized overall rate of return on average policyholders’ surplus dropped to negative 1.2 percent in first-quarter 2009 from positive 6.6 percent in first-quarter 2008.

Insurers’ net loss after taxes for the first three months of 2009 resulted from a combination of losses on underwriting and deterioration in investment results. In first-quarter 2009, insurers withstood $2.5 billion in net losses on underwriting — more than four times the $0.6 billion in net losses on underwriting in first-quarter 2008. The combined ratio worsened to 102.2 percent in the first three months of this year from 99.9 percent in the first three months of 2008, according to ISO and the Property Casualty Insurers Association of America (PCI).

First-quarter 2009 financial results show that private U.S. property/casualty insurers had $437.1 billion in policyholders’ surplus (or statutory net worth) at March 31, 2009. Insurers also had $554.4 billion in loss and loss adjustment expense reserves to cover the cost of settling claims that had already occurred and another $201.5 billion in unearned premium reserves set aside to cover losses arising during the remaining term of policies in effect on March 31, bringing the total funds available to cover losses and other contingencies to just under $1.2 trillion.

Key leverage ratios, such as the premium-to-surplus ratio, show that the property/casualty insurance industry remained well-capitalized, though policyholders’ surplus fell $19 billion, or 4.2 percent, from $456.1 billion at year-end 2008.

The figures are consolidated estimates for all private U.S. P/C insurers based on reports accounting for at least 96 percent of all business written by such insurers.

Underwriting Results

The factors leading to net losses on underwriting included weakness in premiums and increases in loss and loss adjustment expenses. Net written premiums dropped $4 billion, or 3.6 percent, to $106.4 billion in the first three months of 2009 from $110.4 billion in the first three months of 2008. Net earned premiums declined $2.3 billion, or 2.2 percent, to $105.6 billion in first-quarter 2009 from $107.9 billion in first-quarter 2008.

As premiums declined, overall net loss and loss adjustment expenses (after reinsurance recoveries) rose $0.9 billion, or 1.1 percent, to $78.7 billion in first-quarter 2009 from $77.8 billion a year earlier. But ISO estimates that the net catastrophe losses included in insurers’ financial results fell to $3.1 billion — down $0.5 billion, or 13.6 percent, compared with the net catastrophe losses included in insurers’ net financial results for first-quarter 2008. Excluding estimated net catastrophe losses, loss and loss adjustment expenses increased $1.4 billion, or 1.8 percent, to $75.7 billion in first-quarter 2009 from $74.3 billion a year earlier.

According to ISO’s Property Claim Services (PCS) unit, catastrophes occurring in first-quarter 2009 caused $2.9 billion in direct insured losses to property (before reinsurance recoveries) — down 17.1 percent from $3.5 billion in first-quarter 2008.

Other underwriting expenses — primarily acquisition expenses, expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — dropped 3.9 percent to $29.1 billion through three-months 2009 from $30.3 billion through three-months 2008.

The $2.5 billion net loss on underwriting for three-months 2009 amounts to 2.4 percent of the $105.6 billion in net premiums earned during the period.

The 102.2 percent combined ratio for first-quarter 2009 is the worst first-quarter underwriting result since first-quarter 2002, when the combined ratio also equaled 102.2 percent. But the combined ratio for first-quarter 2009 is 0.8 percentage points better than the 103 percent average first-quarter combined ratio since 1986.