'Early Birds' Expect Low-Growth, High- Profit Year In 2008

The property-casualty insurance industry's string of record profits should continue in 2008 even as premium growth grinds to a halt, according to a survey of stock analysts and industry professionals.

Those findings were contained in the Insurance Information Institute's "Early Bird Forecast."

The Institute said low catastrophe losses in 2007 and strong performances in virtually all p-c lines means the industry will deliver one of its best underwriting performances in the past 80 years.

The combined ratio (the ratio of losses and expenses to premiums) for 2008 is projected by the experts to be 97.3--a deterioration from an estimated 93.8 in 2007. If accurate, the 2007 figure would be one of the best since 1920, I.I.I. said.

Analysts, I.I.I. reported, expect the industry's profitability to continue in 2008, albeit with an underwriting performance that will generate a moderately smaller underwriting profit.

The analysts polled uniformly expect premium growth in 2007 to come in below expectations, while the outlook for 2008 remains completely flat to slightly negative.

I.I.I. said the apparent paradox of strong profits but stagnant premium growth is a reminder of the highly cyclical nature of the p-c business and the fact that the industry's financial fortunes are determined by a myriad of factors.

The survey panel's average forecast calls for negative growth in net written premiums in 2008 of minus-0.3 percent, a slight deterioration from the zero growth (0.0 percent) estimate for 2007.

I.I.I. said that, if accurate, the minus-0.3 percent premium growth decline that analysts project for 2008 would be the first annual premium decline since 1943, when, in the midst of World War II, premium volume declined 2.4 percent.

The zero growth estimate for 2007 is also below the 1.5 percent growth projection in the Early Bird survey of December 2006. Since a 2002 peak of 15.3 percent, growth has steadily slowed as personal and commercial lines premium prices have dropped, I.I.I. noted.

A weakening economy, leakage of premium to government-operated reinsurers and insurers, and strong interest in alternative forms of risk transfer--including forms of self-insurance, captives and catastrophe bonds--also contributed to the slowdown, I.I.I. said.

The major exception is for hurricane-exposed coastal property insurance coverage, where costs have soared in the wake of the 2004-to-2005 storm losses.

The Institute said the time from the cyclical peak of premium growth to the cyclical trough has historically been five-to-six years, and reaching a trough next year would be consistent with this experience.

But for years immediately after a trough, I.I.I. said there are two possible trends.

During the mid-1970s hard market, growth peaked in 1975, hit a trough in 1981 and peaked again in 1985-to-1986. The next trough came in 1992, after which the industry experienced slow premium growth.

I.I.I. advised that insurance buyers are "clear winners" from slow premium growth in auto, home and commercial lines. The share of p-c insurance premiums relative to the overall economy will shrink by about 4.9 and 4.3 percent in 2007 and 2008, respectively, it said.

The Institute found many insurers delivered strong earnings during the year, powered in large part by profits that could approach $25 billion in 2007--possibly the second largest underwriting profit on record after the $31.7 billion earned in 2006.

Net income (profits) will likely finish the year in the $60-to-65 billion range--roughly unchanged from 2006. The respite in catastrophe losses in 2006 and 2007 contributed to the improved profitability, I.I.I. said.

Many insurers, the Institute noted, have used the opportunity to restore their claims-paying resources and to reinvest in the future of the industry. Another factor contributing to current profitability is investment earnings, which I.I.I. estimated could exceed $60 billion in 2007.

The full Insurance Information Institute's 2007 Early Bird forecast can be accessed at: http://www.iii.org/media/industry/financials/forecast2007/ .