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 — a key measure of losses and other underwriting expenses per dollar of premium — 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.

Contributing to the decline in policyholders’ surplus in first-quarter 2009, insurers also suffered $16.4 billion in unrealized capital losses on investments (not included in net income after taxes). Other deductions from surplus in first-quarter 2009 included $2.1 billion in dividends paid to stockholders and $0.1 billion in miscellaneous other surplus changes. Partially offsetting the deductions from surplus, insurers raised $0.9 billion in new funds paid in (new capital).

Insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell 69.9 percent to $3.7 billion in first-quarter 2009 from $12.4 billion a year earlier.

Partially offsetting the deterioration in underwriting and investment results, insurers’ miscellaneous other income rose to $0.4 billion in the first three months of 2009 from $0.2 billion in the corresponding portion of 2008, and insurers’ federal income taxes declined to $2.9 billion from $3.6 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.

“Property/casualty insurers absorbed a pounding in first-quarter 2009, as the recession deepened and stock markets tumbled. Based on quarterly data extending back to 1986, insurers’ $1.3 billion net loss after taxes for the first three months of this year is the worst first-quarter result on record,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “The perfect storm that beset the insurance industry in 2008 continued unabated in first-quarter 2009. Yet, aside from some problems in the mortgage and financial guaranty sector, the property/casualty insurance industry emerged intact.”

“With so many once iconic banks, Wall Street institutions, and industrial giants having been done in by the recession and the crisis that swept through the financial system, property/casualty insurers’ policyholders can be secure in the knowledge that property/casualty insurers have the financial resources to fulfill their obligations,” said David Sampson, PCI president and chief executive officer. “Even as other financial service providers succumbed to the recession and financial crisis, property/casualty insurers’ conservative investment strategies and prudent risk management enabled them to continue quietly going about their business — underwriting policies, paying claims, providing millions of jobs, and buying the state and municipal bonds that finance critical projects all across the nation — and all without burdening taxpayers.”

The recession and credit crisis took a disproportionate toll on results for mortgage and other financial guaranty insurers. As economic conditions deteriorated and foreclosure and default rates rose, ISO estimates that mortgage and financial guaranty insurers’ annualized rate of return fell to negative 149.3 percent in first-quarter 2009 from negative 89 percent in first-quarter 2008. Excluding mortgage and financial guaranty insurers, the insurance industry’s rate of return declined to 2.2 percent for the first three months of 2009 from 9.5 percent for the first three months of last year, as the industry’s net income fell 80.1 percent to $2.4 billion from $11.9 billion.

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.

“At negative 3.6 percent for first-quarter 2009, net written premium growth was the weakest for any first-quarter since the start of ISO’s quarterly data for the property/casualty industry. Prior to this year, the record low for first-quarter premium growth was the negative 0.8 percent for first-quarter 2008, with first-quarter premium growth ranging as high as 13.5 percent in 1987,” said Murray.

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. Nonetheless, the $2.9 billion in direct catastrophe losses in first-quarter 2009 is more than one and half times the $1.7 billion average for all first quarters during the ten years from 2000 to 2009.

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.

Dividends to policyholders also declined, falling $0.1 billion, or 14.9 percent, to $0.3 billion in the first quarter of this year from $0.4 billion in the first quarter of 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, whereas the $0.6 billion net loss on underwriting for three-months 2008 amounted to 0.5 percent of the $107.9 billion in net premiums earned during the first quarter of last year.

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 the start of ISO’s quarterly data in 1986.

“With catastrophe losses having declined and with the experts forecasting a more moderate hurricane season, we now face a genuine risk of complacency that could have disastrous consequences,” said Sampson. “The hurricane season has just started, and it just takes one storm like Hurricane Ike or Hurricane Katrina or Hurricane Andrew to disrupt millions of lives and cause tens of billions of dollars in damage. Now is the time for all of us — insurers, regulators, legislators, businesses, and consumers — to take the steps that need to be taken to make sure we’ll be prepared when the next big storm hits.”

“Though natural catastrophes didn’t have a big impact on insurers’ results for first-quarter 2009, the recession and the crisis sweeping through the financial system certainly took a toll on underwriting results for the period, with foreclosures and other credit problems contributing to disproportionate deterioration in results for mortgage and financial guaranty insurers,” said Murray.

As mortgage and financial guaranty insurers’ net written premiums fell 28 percent to $1.5 billion in the first three months of this year from $2.1 billion in the first three months of 2008, their loss and loss adjustment expenses jumped 18.1 percent to $5.7 billion from $4.8 billion, Murry said. “As a result, their combined ratio jumped to 299.6 percent in first-quarter 2009 from 268.2 percent in first-quarter 2008. Excluding mortgage and financial guaranty insurers, industry net written premiums fell 3.1 percent, loss and loss adjustment expenses were essentially unchanged at $73.1 billion, and the combined ratio increased to 98.4 percent in first-quarter 2009 from 96.8 percent in first-quarter 2008.”

Source: PCI, ISO