Perhaps the best thing that can be said about 2008 is that it is over. The recession that undermined the economy all year long is a vicious one, systematically destroying financial markets, institutions, jobs and confidence--all of which impact the prospects for property-casualty insurer growth and profitability in 2009. However, p-c insurers are standing strong amid general weakness in the overall financial services sector.

Indeed, insurers are making good on their past commitments, and are poised to facilitate the economic recovery to come--particularly if the new president, Barack Obama, comes through with the massive stimulus package he has on the drawing board, which could generate welcome business activity, new infrastructure projects and exposure growth for carriers of many lines.

The global economic meltdown of 2008 has often been likened to the Great Depression, but generally speaking, that analogy is incorrect. Indeed, more than a year-and-a-half into the crisis, employment, wages, prices--even stocks--have held up much better than they did in the 1930s.

Few appreciate the fact that concerted and coordinated efforts by the U.S. Treasury and Federal Reserve and their counterparts around the globe have already prevented the type of financial maelstrom that sucked the planet into a decade of economic despair some 80 years ago.

In terms of the impact on macroeconomic activity such as manufacturing, home construction and employment--which drive insurance exposure, and ultimately premium growth--the twin recessions of the early 1980s are a much better analogy.

The stock market meltdown is not unlike the dot.com bust and post-9/11 crash earlier this decade, and several others in the 1970s and 1980s. It is the broad loss of faith in financial institutions, the depletion of personal wealth, and the evaporation of consumer and business confidence that beg comparisons with the 1930s.

What about the property-casualty insurance industry? To be sure, the industry has taken its lumps. But while the impact of turmoil in the financial markets affects individual insurers differently, the industry as a whole remains fundamentally strong.

The basic function of insurance--the orderly transfer of risk from client to insurer--continues without interruption. This means that insurers today continue to sell and renew policies, pay claims, and develop new products to protect people's property, businesses and lives.

More importantly, unlike banking, insurance markets are functioning normally. Twenty-five banks failed in 2008 as a result of the financial crisis, but not a single insurer followed suit.

Still, the industry's $445 billion in premiums are drawn from every hard-hit Main Street in America. Consider this:

o Home and auto insurance account for nearly half of total revenues, but new home and car sales have crashed to their lowest levels in decades and show little signs of recovery. The 60 percent plunge in new home construction since 2005 reduces premium growth in the homeowners insurance line by at least $1 billion annually.

o Insurance sales to businesses yield $225 billion in premium, yet most are scaling back production and employment.

o Workers' compensation would appear to be especially vulnerable to the swooning economy, with more than two million jobs lost in 2008, and two million more expected to be lost in 2009 and 2010. A loss of four million jobs would bring growth in the payroll exposure base to a halt and cause the loss of nearly $1.3 billion in workers' comp premium (or its self-insured equivalent).

o Other key lines have similarly been hurt by the recession, such as private passenger and commercial auto, commercial property, and inland and ocean marine.

In the end, the recession that began in December 2007 will cost insurers billions of dollars in lost business opportunities before it is over. The consensus view among economists is that a recovery--an anemic one at that--will not begin until late 2009.

The reality, however, is that recessionary impacts on p-c insurance premiums have historically been quite modest, especially in comparison to other sectors of the economy--such as construction, manufacturing and retail trade. For example, the $1.3 billion loss in workers' comp premiums and the self-insured equivalent work out to about 1 percent of private and state fund premiums written.

Home insurers may be losing out on about $1 billion in premiums annually due to the crash in new construction, but that's money the industry never had to begin with. Insurers will continue to insure the entire existing stock of homes, which generates about $55 billion in premiums annually.

The bottom line is that while the p-c insurance industry is by no means immune to the macroeconomic forces buffeting the economy today, it is highly resilient.

Overall, 98-to-99 percent of the industry's total premiums are generated on a renewal basis, in large part because most insurance purchases are nondiscretionary.

These factors act as a firewall between the industry and the broader economy, and are a major distinguishing feature between p-c insurance and the industries it insures.

Thus, while homebuilders' fortunes plunged as sales fell by 60 percent between 2005 and 2008, there was no impact on the number of homes in need of insurance.

Likewise, auto manufacturers over the same period suffered a 21 percent decline in new car and truck sales, but the number of vehicles on the road in need of insurance is little changed. To varying degrees the same story holds for insurance sold on aircraft, ships, infrastructure, employees and most types of liability coverage (as tort threats are entirely resistant to economic downturns).

The current recession has savaged the U.S. economy with breathtaking speed. Within a year of its start in December 2007, it had toppled some of mightiest names on Wall Street, spread fear and panic throughout the global financial system, forced the effective nationalization of major financial institutions, and frozen global credit markets--in addition to claiming more than two million American jobs.

Indeed, were this recession a hurricane, it would be a strong Category 4 on the Saffir-Simpson scale.

One signature feature of the current economic crisis, of course, is the ravaging of financial assets. So, what kind of beating did the industry's investment portfolio--valued at $1.3 trillion at year-end 2007--take in 2008, and with what implications?

Through the first nine months of 2008 alone, the p-c insurance industry racked up realized and unrealized capital losses of $9.7 billion and $31.1 billion, respectively--dragging down policyholder surplus by $43.3 billion, or 8.3 percent, from its year-earlier peak.

Although some of these losses came from the usual recession-driven plunge in stock prices, significant losses were recorded in virtually every category of the fixed-income market, which accounts for two-thirds of insurer assets.

Among the more unusual casualties in the 2008 credit market bloodbath were municipal bonds, investment-grade corporate bonds, foreign bonds, real estate as well as the now somewhat more notorious category of investments--including residential and commercial mortgage-backed securities, collateralized debt obligations and asset-backed securities (backing such things as credit card receivables, vehicle loans and student loans).

The lesson of 2008 is not that all investments are bad, but rather something far more elemental--insurers have just two sources of revenue: premiums and investment earnings. When one falls, the other has to pick up the slack.

Hurricanes, auto accidents, workplace injuries and lawsuits will occur no matter what happens in the investment markets, so Wall Street's disastrous performance in 2008--coupled with record-low interest rates and the possibility of more turmoil in the year(s) ahead--serves as a stern reminder that the industry's long-term survival is first and foremost tied to its ability to consistently generate underwriting profits.

There are hopeful signs this lesson is becoming better understood within the industry. Although insurers ran an underwriting loss in 2008 ($19.9 billion through Sept. 30) due largely to some $25 billion in catastrophe losses, three of the previous four years were in the black.

Indeed, were it not for the distortionary effects of losses from mortgage and financial guaranty insurers as well as outsized catastrophe losses, the p-c industry might well have recorded its third consecutive underwriting profit in 2008.

The "art" of underwriting for a profit--a combined ratio under 100--was only recently rediscovered. In the quarter-century between 1979 and 2003, the industry failed to generate even a single underwriting profit, but did manage to run up $465 billion in underwriting losses.

Journey back further in history and the story is entirely different. In the 33 years from 1956 through 1978, insurers enjoyed underwriting profits in 21 of them.

Traveling back still further in time, we find that insurers ran underwriting profits in all but six years during the 36-year interval between 1920 and 1955--including 10 of the 13 years affected by the Great Depression (1929-1941), which so many have likened to the current era.

Throughout the entirety of the period from the 1920s through the early 1970s, interest rates were relatively low, as they are today, and the 89 percent drop in the market crash that began in 1929 instilled a justifiable and indelible wariness about investing in stocks. Generations of insurance industry management understood that investment income should be treated like "icing on the cake," but that long-run success was contingent on sustained underwriting profitability.

No management team of any insurer operating in 2009 was trained to think in this way--hence the need to rediscover the "art" of underwriting profitability. It is too soon to tell whether this lost art has been permanently rediscovered, but results since 2004 are encouraging.

Regulators, too, must comprehend and quickly accept that the era of significant offsets to premium rates through investment earnings is over.

They must also recognize that the industry's cost of capital--the rate of return necessary to attract money into the business, and then retain it--has risen as the global financial crisis has caused once vast pools of liquidity to shrivel. Regulators must also act accordingly, allowing insurers to earn a risk-appropriate rate of return that accurately reflects the new investment reality.

The election of Barack Obama in 2008 was ultimately a referendum on economic issues. As president, Mr. Obama has pledged to embark on a two-year economic stimulus program that will direct some $675 billion to $775 billion in spending on a wide variety of projects. The Obama administration hopes that the spending will create or preserve three million jobs.

A significant share of the spending will be allocated toward investments in infrastructure, energy, health and education. This should increase the demand for many types of commercial insurance.

In the case of workers' comp, for example, a rough estimate would suggest that as much as $960 million in workers' comp premiums will flow to insurers from employers working on stimulus projects.

If the stimulus plan and companion efforts to thaw credit markets help boost consumer confidence, personal lines insurers will benefit as well, albeit with a lag.

Meanwhile, the near collapse of the U.S. financial system in 2008 assures a regulatory tsunami will sweep the financial services sector in 2009. This much the Obama administration and congressional leaders have already vowed.

The degree to which this will affect p-c insurers is unclear at this early juncture.

Efforts at the federal level will likely be focused on identifying nodes of systemic risk that could give rise to future financial crises, forcing changes in how much risk can be assumed and how it is managed, and coupled with tighter oversight.

Property-casualty insurance, so far, is not among the most worrisome risk nodes, and the conservative approach of this segment to risk management could allow p-c insurers to emerge from the financial crisis and ensuing regulatory backlash with their operating model more intact than any other segment.

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P-C Industry Standing Strong Despite

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