Battered by declining premium volume, bad weather and steep declines in investment income, the property-casualty insurance sector racked up a third-quarter $9.9 billion net loss, compared with a profit of $16.7 billion in the same period last year, two industry groups reported today.

For the first nine months of the year, the industry's net income after taxes dropped 91.8 percent to $4.1 billion, plummeting from $49.6 billion last year, according to the Property Casualty Insurers Association of America (PCI) and the Insurance Services Office Inc. (ISO).

Their joint report said the net loss for the third quarter was a $26.7 billion negative swing from 2007's figure, prompting a fall in the industry's annualized rate of return to negative-8 percent, compared with a positive return of 13 percent the year before.

A big factor, noted ISO and PCI, was the $19.9 billion net underwriting loss insurers sustained in the first nine months--representing a $38.2 billion adverse swing from $18.4 billion in underwriting gains last year.

As a result, the industry's combined ratio measure of profitability deteriorated 11.8 points, clearing the 100 breakeven point to end up at 105.6, compared to 93.8 for 2007's first three quarters.

The industry-wide rate of return dropped to 1.1 percent for the first nine months of 2008, compared with 13.1 percent last year.

With Wall Street hammered by subprime- and credit-related woes, investment gains for insurers fell 40.7 percent--to $28.3 billion for the first nine months of 2008, down from $47.8 billion the year before.

"Even the most conservative of portfolios was impacted significantly during the quarter, which bore witness to some of the most traumatic events in the economic history of the United States," said Robert P. Hartwig, president of the Insurance Information Institute.

Among these key events, he cited "the largest bank failure ever--Washington Mutual" as well as "the collapse of the 158-year-old investment bank Lehman Brothers, and the government rescue of insurer American International Group."

A minor positive trend was noted, with federal income taxes declining to $5.1 billion from $15.5 billion.

The combination of a down economy, a financial system crisis and severe weather losses hit insurers with a "perfect storm," according to ISO's assistant vice president for financial analysis, Michael R. Murray.

Indeed, the nine-month 1.1 percent annualized rate of return was the second-lowest in 23 years, Mr. Murray noted.

One troubled sector dragged industry-wide results down considerably, he said. ISO estimated that mortgage and financial guaranty insurers' annualized rate of return fell to negative-130.6 percent for the first nine-months, from a positive return of 14.1 percent in 2007.

In fact, excluding mortgage and financial guaranty insurers, the insurance industry's annualized rate of return declined to 4.2 percent for the first three quarters of 2008, down from 13.1 percent for 2007, with the industry's net income falling 68 percent.

PCI President and Chief Executive Officer David Sampson said the fact that insurers managed to eke out a profit at all in this sinking economy was "a testament to their risk management, and a sign that the property-casualty insurance industry remains well able to fulfill its obligations to policyholders."

The continuing soft market, along with a slowdown in business activity as the recession deepened, took its toll on the industry's top line as well.

Net written premiums dropped 0.4 percent, falling $1.4 billion to $336 billion. It was the industry's weakest performance for the first nine months of any year since the start of ISO's quarterly financial data for the industry. The previous record was a drop of 0.2 percent in 2005, noted Mr. Murray.

"Written premiums have not declined versus year-ago levels for six successive quarters. This is absolutely unprecedented," based on the last 22 years of data, according to Mr. Sampson.

The soft market is primarily to blame, as the PCI-ISO report noted the Council of Insurance Agents and Brokers' third-quarter pricing survey, which found that commercial premium rates had declined 11 percent on average for all sizes of accounts.

Net earned premiums managed to rise $1.2 billion, or 0.4 percent, to $330.4 billion for the first nine months.

Disaster losses also took a severe toll on the industry's bottom line. ISO said it estimates that net catastrophe losses increased to $21.6 billion for the first nine months, up more than four-fold from $5 billion the year before.

However, even excluding estimated net catastrophe losses, non-cat loss and loss adjustment expenses increased $23.1 billion, or 10.8 percent, to $237.2 billion for the first three quarters.

According to ISO's Property Claim Services unit, catastrophes occurring in the first nine months of 2008 caused $24.9 billion in direct insured losses to property (before reinsurance recoveries)--more than five times the $4.8 billion recorded due to catastrophes a year ago, and more than twice the $12.3 billion average for nine-month cat losses during the past 20 years.

The investment markets this time could not compensate for rising insured losses.

Combining the $9.7 billion in realized capital losses through the first nine months of 2008, with $31.1 billion in unrealized capital losses during the period, insurers posted $40.8 billion in overall capital losses through the first three quarters of 2008--a $55.2 billion swing from the $14.3 billion in overall capital gains the year before.

"The sharp decline in profitability is primarily attributable to poor investment market performance, high catastrophe losses, and a spillover of the housing and credit bubble collapse into the mortgage and financial guaranty segments of the property-casualty insurance industry," according to Mr. Hartwig.

"Excluding this segment and normalizing catastrophe losses reveals a much more modest decline in profitability, more in keeping with the pace normally associated with cyclical downturns," he added.

However, one continuing cause for concern, he noted, is that "premium growth remains in negative territory, though there are some early signs of a reversal of this trend."

Special Reports /

P-C Sector Had Quarterly Loss Of $9.9 Billion

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