P/C Insurers Profitable in 2008; Take Hit From Catastrophes, Financial Crisis

Property/casualty insurers remained profitable in 2008 despite taking hits from several catastrophes, the recession and the ongoing financial crisis. P/C insurers earned $2.4 billion in net income after taxes in 2008, but profits and profitability both tumbled as catastrophe losses, the recession, and the crisis in the financial system took a toll on underwriting and investment results.

The P/C industry’s $2.4 billion in net income after taxes last year was down $60.1 billion, or 96.2 percent, from $62.5 billion in 2007. And reflecting the decline in net income, the insurance industry’s overall rate of return on average policyholders’ surplus dropped to 0.5 percent in 2008 from 12.4 percent in 2007.

Contributing to the declines in insurers’ net income and overall rate of return, insurers suffered $21.2 billion in net losses on underwriting in 2008 — a $40.5 billion adverse swing from insurers’ $19.3 billion in net gains in 2007. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — worsened to 105.1 percent last year from 95.5 percent in 2007, according to ISO and the Property Casualty Insurers Association of America (PCI).

Despite the decline in profits, the full-year 2008 financial results show that private U.S. property/casualty insurers remain well capitalized, posting $455.6 billion in policyholders’ surplus (or statutory net worth) at year-end 2008.

Insurers also had $555.6 billion in loss and loss adjustment expense reserves to cover the cost of settling claims that had already occurred and another $200.8 billion in unearned premium reserves set aside to cover losses arising during the remaining term of policies in effect at year-end 2008, bringing the total funds available to cover losses and other contingencies to just over $1.2 trillion.

Key leverage ratios, such as the premiums-to-surplus ratio, show that the property/casualty insurance industry remained well capitalized, though policyholders’ surplus fell $62.3 billion, or 12 percent, from $517.9 billion at year-end 2007.

Insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell 50.9 percent to $31.4 billion in 2008 from $64 billion in 2007.

Partially offsetting the deterioration in underwriting and investment results, insurers’ miscellaneous other income rose $0.9 billion to negative $0.1 billion in 2008 from negative $1 billion the year before, and insurers’ federal income taxes declined to $7.7 billion from $19.8 billion.

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

“The ‘perfect storm’ that beset the industry in third-quarter 2008 continued unabated in the fourth quarter, as the downturn in the economy gathered momentum and financial markets tumbled. Yet, aside from some problems in the mortgage and financial guaranty sector, the property/casualty insurance industry emerged intact,” said Michael R. Murray, ISO’s assistant vice president for financial analysis.

But make no mistake — insurers absorbed a pounding last year, Murray added.

“Insurers’ net income in 2008 would have been the lowest in more than two decades if not for the net loss the industry suffered in 2001 when terrorists destroyed the World Trade Center. Insurers’ 0.5 percent rate of return for 2008 was their second-lowest full-year rate of return since the start of ISO’s annual data in 1959 and 8.7 percentage points below insurers’ 9.2 percent average rate of return during the past 50 years,” Murray said.

“That property/casualty insurers remained profitable in 2008 and finished the year with more than a trillion dollars available to pay claims is a remarkable testament to their risk management and conservative approach,” said David Sampson, PCI president and CEO. “Unlike the banks and Wall Street icons brought down by the financial crisis, and unlike some once mighty industrial giants that have had to turn to Washington for financial aid, property/casualty insurers have thus far been able to continue servicing policyholders without skipping a beat and without burdening taxpayers. In fact, property/casualty insurers pay taxes, provide jobs, and contribute to local economies by buying the state and municipal bonds that finance so many critical projects.”

The recession and credit crisis took a disproportionate toll on results for mortgage and other financial guaranty insurers. ISO estimates that mortgage and financial guaranty insurers’ annualized rate of return fell to negative 141.1 percent in 2008 from negative 13.4 percent in 2007. Excluding mortgage and financial guaranty insurers, the insurance industry’s rate of return declined to 4.2 percent for 2008 from 13.2 percent for 2007, as the industry’s net income fell 68.8 percent.

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 $6 billion, or 1.4 percent, to $434.6 billion in 2008 from $440.6 billion in 2007. Net earned premiums declined $0.8 billion, or 0.2 percent, to $438.1 billion last year from $438.9 billion in 2007.

“At negative 1.4 percent for 2008, net written premium growth was the weakest for any year since the start of ISO’s annual financial data for the property/casualty industry. The previous record low for annual premium growth was negative 0.6 percent in 2007, with premium growth ranging as high as 22.2 percent in 1985 and 1986,” said Murray. “Market surveys and U.S. government data indicate that declining demand, escalating competition, and declines in the price of insurance cut into premiums.”

As net written premiums fell in 2008, the nation’s current-dollar gross domestic product [GDP], which takes into account both inflation and real growth, grew 3.3 percent, Murray added.

As premiums declined, overall net loss and loss adjustment expenses (after reinsurance recoveries) jumped $42.2 billion, or 14.2 percent, to $339.2 billion in 2008 from $297 billion in 2007. ISO estimates that the net catastrophe losses included in insurers’ financial results increased to $21.8 billion last year from $6.9 billion in 2007. Excluding estimated net catastrophe losses, loss and loss adjustment expenses increased $27.4 billion, or 9.4 percent, to $317.4 billion in 2008 from $290.1 billion a year earlier.

According to ISO’s Property Claim Services® (PCS®) unit, catastrophes occurring in 2008 caused $26 billion in direct insured losses to property (before reinsurance recoveries) — nearly four times the $6.7 billion in direct insured losses to property due to the catastrophes occurring in 2007 and almost twice the $14 billion average for catastrophe losses during the past 20 years.

Other underwriting expenses — primarily acquisition expenses, expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — dropped 1.6 percent to $118.2 billion in 2008 from $120.1 billion in 2007.

The $21.2 billion net loss on underwriting for 2008 amounts to 4.8 percent of the $438.1 billion in net premiums earned during the year, whereas the $19.3 billion net gain on underwriting for 2007 amounted to 4.4 percent of the $438.9 billion in net premiums earned during that year.

The 105.1 percent combined ratio for 2008 is the worst full-year underwriting result since the 107.3 percent combined ratio for 2002. And the combined ratio for 2008 is one percentage point worse than the 104 percent average combined ratio since the start of ISO’s annual data in 1959.

“Underwriting results were significantly affected by catastrophe losses in 2008,” said Sampson. Last year’s hurricane season spurred a $14.8 billion increase in net catastrophe losses to $21.8 billion. This accounts for about a third of the deterioration in underwriting results,” said Sampson. “If net catastrophe losses had remained the same as they were in 2007, the combined ratio would have increased 6.2 percentage points to 101.7 percent last year, instead of jumping 9.6 percentage points to 105.1 percent. But as devastating as Hurricanes Gustav and Ike were, advanced computer modeling shows that it is only a matter of time before we’re struck by a catastrophe causing $100 billion or more in insured losses.”

Sampson says insurers, regulators, legislators, businesses, and consumers need to take steps now to minimize the damage and negative impact on consumers that will occur when the big hurrican strikes.

“Along with natural catastrophes, the recession and the crisis sweeping through the financial system took a toll on underwriting results for 2008, with foreclosures and other credit problems contributing to disproportionate deterioration in results for mortgage and financial guaranty insurers,” said Murray. “Though mortgage and financial guaranty insurers’ net written premiums rose 4 percent to $8.5 billion in 2008, their loss and loss adjustment expenses soared 141.2 percent to $26 billion. As a result, their combined ratio jumped to 299.3 percent in 2008 from 149.1 percent in 2007. Excluding mortgage and financial guaranty insurers, industry net written premiums fell 1.5 percent, loss and loss adjustment expenses rose 9.4 percent, and the combined ratio increased to 101 percent in 2008 from 94.6 percent in 2007.”

Fourth-Quarter Results

The insurance industry suffered a $1.7 billion net loss after taxes in fourth-quarter 2008 — a $14.6 billion adverse swing from the industry’s $12.9 billion in net income after taxes in fourth-quarter 2007. Reflecting the net loss after taxes, insurers’ annualized rate of return dropped to negative 1.4 percent in fourth-quarter 2008 from 9.9 percent a year earlier.

Excluding mortgage and financial guaranty insurers, insurers’ annualized fourth-quarter rate of return fell to 4.3 percent in 2008 from 13.1 percent in 2007, as their net income dropped 70.3 percent.

The industry’s net loss for fourth-quarter 2008 consisted of $11 billion in pretax operating income, less $10.1 billion in realized capital losses on investments and $2.6 billion in federal and foreign income taxes.

The industry’s $11 billion in pretax operating income in fourth-quarter 2008 is down $5.4 billion, or 32.7 percent, from the $16.4 billion in pretax operating income in fourth-quarter 2007. Fourth-quarter 2008 pretax operating income reflects the excess of $13.1 billion in net investment income over $1.3 billion in net losses on underwriting and negative $0.8 billion in miscellaneous other income.

The $1.3 billion in net losses on underwriting in fourth-quarter 2008 constitutes a $2.3 billion adverse swing from the $0.9 billion in net gains on underwriting in fourth-quarter 2007. Contributing to the deterioration in underwriting results, overall loss and loss adjustment expenses rose $2.5 billion, or 3.2 percent, to $80.4 billion in fourth-quarter 2008 from $77.9 billion in fourth-quarter 2007. Excluding estimated net catastrophe losses, loss and loss adjustment expenses increased $3.8 billion, or 5 percent, to $79.8 billion in the fourth quarter of 2008 from $76 billion a year earlier.

Direct insured losses from catastrophes fell to $0.3 billion in fourth-quarter 2008 from $1.9 billion in fourth-quarter 2007, according to ISO’s PCS unit.

Fourth-quarter 2008 net losses on underwriting amount to 1.2 percent of the $107.7 billion in premiums earned during the period, in contrast to fourth-quarter 2007 net gains on underwriting amounting to 0.9 percent of the $109.8 billion in premiums earned during the period.

The industry’s combined ratio deteriorated to 103.6 percent in fourth-quarter 2008 from 100.9 percent in fourth-quarter 2007. The fourth-quarter combined ratio last rose to 103.6 percent in 2005, when Hurricane Wilma struck.

The $1.3 billion in net losses on underwriting is after deducting $0.9 billion in premiums returned to policyholders as dividends, with dividends to policyholders down from $1.3 billion in fourth-quarter 2007.

Written premiums fell $4.5 billion, or 4.4 percent, to $98.6 billion in fourth-quarter 2008 from $103.2 billion in fourth-quarter 2007. At negative 4.4 percent in fourth-quarter 2008, written premium growth was the weakest for any fourth quarter since the start of ISO’s quarterly premium growth records in 1986, with the previous record lows for fourth-quarter premium growth being negative 2.6 percent in 2007 and negative 0.1 percent in 1991.

“Written premiums have now declined versus year-ago levels for a remarkable seven successive quarters. The declines that started in second-quarter 2007 were initially a reflection of intensifying competitive pressures in insurance markets but now also reflect the impact of the recession on the demand for insurance,” said Sampson. “Prior to this unprecedented string of declines, ISO’s quarterly data extending back to 1986 shows that written premiums declined in just two other quarters — falling 0.1 percent in fourth-quarter 1991 and 4.8 percent in third-quarter 2005 — with the decline in third-quarter 2005 resulting from a special transaction in which one insurer ceded $6 billion in premiums to its foreign parent.”

Source: ISO, PCI