With investment returns taking a beating, insurers on the whole reported some of their worst results in years. Through the first half, the property-casualty industry saw after-tax income drop 57.6 percent--from $32.7 billion in 2007 to $13.9 billion in 2008.
It didn't help that high catastrophe losses and a stubbornly soft market left the industry with a first-half underwriting loss of over $5.6 billion--a $20.1 billion swing from the $14.5 billion underwriting gain last year. That pushed the industry's combined ratio back over the magic 100 mark, up to 102.1--up almost 10 points from 2007.
The industry's return dropped from 13.1 percent in 2007 to just 5.4 percent this year, making it even harder to attract new capital.
Industrywide, Towers Perrin estimated that third-quarter statutory surplus might plummet by $42 billion--about 8 percent--compared to the start of 2008. For the full-year, the drop could be a whopping $80 billion, or 15 percent, Towers said.
Meanwhile, the credit crunch has insurers worried about their ability to raise capital--especially if another major catastrophe strikes. In recent years, investors would line up around the block to capitalize on rising property-catastrophe rates, but with many individual investors and hedge funds short on cash these days, generating new capacity will be tricky, if not impossible.
The reinsurance market is seen as particularly vulnerable. With capacity falling, new capital hard to come by and demand likely to rise, the elements are all in place for a jump in reinsurance rates and a tightening of terms and conditions--although the word on the street is that primary carriers might retain more risk to compensate.
Of course, the biggest source of capital these days is Washington, D.C., as struggling institutions look to tap what's left of the $700 billion Troubled Asset Relief Program. AIG already has $150 billion in federal funds available to hold the fort until the company can sell enough assets to make good on its loan and stand alone again.
Other insurers, such as The Hartford, either bought a thrift, or are in the market for a banking institution to meet TARP's investment qualifications.
There were hefty private cash infusions as well, with The Hartford getting $2.5 billion from Allianz (parent of rival Fireman's Fund), while CNA received $1.25 billion from its parent, The Loews Corp.
The deepening recession will make it harder for insurers to turn around their profit pictures any time soon. The collapse in the once booming construction market, for example, means exposure growth will be non-existent or head into negative territory.
With bankruptcies on the rise, fewer new businesses launched and layoffs by the thousands at firms that have survived, the country's insurable base is contracting, making it harder for carriers to boost their top lines--even if they try to raise rates.
From a liability perspective, the nation's financial woes have created more exposures and likely will spur billions in new claims against a wide range of insurance carriers. For instance, more layoffs also tend to mean more fraudulent claims in workers' comp.
The subprime crisis is also expected to rapidly multiply the number of lawsuits against directors and officers of firms either giving out such loans or trading in them, while a slew of professionals--from investment advisers, to mortgage brokers, to real estate sellers--are vulnerable to errors and omissions suits.
Long before the depth of the subprime crisis was revealed, there were repercussions being cited for insurers. Back in February, we reported that some feared the subprime fallout would spark growth in arson, as financial woes drive desperate policyholders to burn their homes.
In addition, in March, we reported that an explosion in personal loan defaults might reignite the already heated debate over using credit scores in underwriting. On March 24, we speculated that "with consumers likely to get burned in the worsening credit crunch, advocates expect legislators to reconsider bans or at least tighter restrictions over the insurance scoring tool."
Any way you cut it, times are tough, and as President-elect Barack Obama has warned, it's probably going to get a lot worse before it gets any better.
