Data Shows P-C Insurers' Quarterly Net Down 36%

Their report said the p-c sector's overall profitability, as measured by its rate of return on average policyholders' surplus for the year, dipped to 12.3 percent in 2007 from 14.4 percent in 2006.

Net gains on underwriting fell 38.9 percent to $19 billion in 2007, down from $31.1 billion the year before.

The combined ratio edged up to 95.6 in 2007, from 92.4 in 2006.

Partially offsetting the decline in net gains on underwriting, insurers' net investment gains–the sum of net investment income and realized capital gains–climbed 13.9 percent to $63.6 billion in 2007, up from $55.8 billion in 2006.

The figures are consolidated estimates for all private U.S. p-c insurers, based on reports accounting for at least 96 percent of all business written by those carriers.

Despite the deterioration in underwriting results, the 95.6 combined ratio for 2007 "is the second best for any year since 1959, when ISO's annual records begin," noted Michael R. Murray, ISO's assistant vice president for financial analysis.

However, Mr. Murray said underwriting results "weren't good enough for insurers to achieve the rate of return typically earned by firms in other industries."

With full-year 2007 investment results, financial leverage and tax rates figured in, ISO estimates that the combined ratio would have had to be more than two points better–93.3–for insurers to have earned the same 13.9 percent long-term average rate of return as the Fortune 500.

David Sampson, PCI president and chief executive officer, said today's low interest rates and investment yields mean "insurers must now post significantly better underwriting results just to be as profitable as they once were."

Insurers' combined ratio for 2007, he said, was 12.5 points better than for 1986. But even with improved underwriting results, insurers' rate of return for 2007 was 2.7 points below insurers' rate of return for 1986, Mr. Sampson noted.

The report found that deterioration in underwriting results is due to weakness in premiums and an increase in losses and loss adjustment expenses.

The groups reported that net written premiums actually dropped to $440.8 billion in 2007, down 0.6 percent from $443.5 billion in 2006, which represented a 4.2 percent gain at the time, reflecting escalating competition in insurance markets. Net earned premiums were found to have edged up to $439.1 billion last year, up just 0.8 percent, compared to the 4.3 percent growth rate a year earlier.

The decline in written premiums in 2007 is the first on record, according to Mr. Sampson.

"Despite ongoing problems in some coastal property insurance markets, government data suggests that escalating competition is cutting into premiums," he said

"All else being equal," added Mr. Sampson, "one would expect premiums to rise as the economy grows and inflation increases the amount of insurance people need. However, written premiums fell 0.6 percent in 2007, even though the nation's gross domestic product increased 4.9 percent."

Mr. Murray said "escalating competition is also taking a bite out of commercial lines premiums. ISO MarketWatch data shows that commercial lines premiums on renewals fell 3.4 percent in third-quarter 2007, with the latest reports from agents, brokers and risk managers all indicating that commercial insurance markets have continued softening since then."

"Looking at the bigger picture, ISO's analysis indicates that insurers' recent results have led to an increase in the supply of insurance, which is contributing to widespread downward pressure on the price of insurance in competitive markets that is benefiting both consumers and businesses alike," said Mr. Murray.

Mr. Sampson said that at this point, it is too soon to tell whether there has been a fundamental change in the dynamics of insurance cycles that will lead to a soft landing, or whether competitive pressures will continue escalating as they have in the past.