Underwriting Deterioration Eating Into P-C Profits

The property-casualty insurance industry should once again show solid profits this year, but there are signs that underwriting gains are beginning to deteriorate, according to the latest survey of industry-wide results.

The figures were gathered by ISO and the Property Casualty Insurers Association of America and are consolidated estimates representing 96 percent of all business written by private U.S. p-c insurers.

Through the first nine months of 2007, p-c industry net income after taxes rose more than 7 percent compared to the same period for 2006, from $46.1 billion to $49.4 billion, according to the report.

The results, the groups said, were fueled by the industry's net income, policyholders' surplus (the insurer's net worth measured according to Statutory Accounting Principles) that increased 7 percent, or $35.6 billion, to $521.8 billion.

However, the survey found some slippage in overall profitability measured by its annualized rate of return on average policyholder surplus that fell from 13.8 percent to 13.1 percent. Net gains on underwriting dropped 25.3 percent from $24.3 billion for the first nine months of 2006 to $18.1 billion for the 2007 nine-month period.

The combined ratio over the period worsened by 2.3, going from 91.5 over the first three quarters of 2006 to 93.8 for the first nine months of 2007.

Michael R. Murray, ISO assistant vice president for financial analysis, pointed out that the industry's combined ratio of 93.8 is the second best for the first nine months since 1986. However, he said, for insurers to reach an average rate of return of 13.9 percent–the long-term average rate of return for Fortune 500 companies–the p-c industry's combined ratio needed to be one point better.

In his commentary on the first nine months, Robert P. Hartwig, president of the Insurance Information Institute, said the first nine months “are generally excellent and so far have proven surprisingly resilient” in the face of the intense competition for business within the industry.

If the underwriting deterioration holds true to form as in past cycles, however, the industry's return on equity will bottom out in 2011 at about 1- or 2 percent, and not become profitable again until 2015 or 2016.

“The most important question facing the industry today is whether this painful and destructive cycle can be broken and with it, the commensurate surge in insurer impairments that invariably occur,” said Mr. Hartwig.

He said recent carriers changes from past business practices may be making a difference, translating into “a shallower market cycle” and more modest dip in profits.

“Insurance CEOs continue to vow that it will be different this time around, and 2008 is quickly shaping up to be the year when the industry's fortunes will be cast,” he said.