P-C Sector First-Half Net Drops 57.4%

Battered by deteriorating investment and underwriting results, the U.S. property-casualty insurance sector's net income after taxes fell 57.4 percent to $13.9 billion in first-half 2008 from $32.7 billion in first-half 2007, two insurance industry groups reported.

The data was released by the Jersey City, N.J.-based Insurance Services Office and the Property Casualty Insurers Association of America (PCI), Des Plaines, Ill.

Overall, the industry's profitability measured by annualized rate of return on average policyholders' surplus (or statutory net worth) dropped to 5.4 percent in first-half 2008 from 13.1 percent in first-half 2007, ISO and PCI said.

They reported that insurers sustained $5.6 billion in net losses on underwriting in first-half 2008--a $20.2 billion adverse swing from insurers' $14.5 billion in net gains on underwriting in first-half 2007.

The combined ratio--a key measure of losses and other underwriting expenses per dollar of premium--worsened to 102.1 in the first half of this year from 92.7 in the first half of 2007.

It was the worst first-half underwriting result since the 105.1 combined ratio for the first half of 2002, the companies said, adding that the combined ratio for first-half 2008 compares favorably with the 104 percent average for all first halves since the start of ISO quarterly data in 1986.

Insurers' net investment gains--the sum of net investment income and realized capital gains (or losses) on investments--fell 18.4 percent to $24.8 billion in first-half 2008 from $30.3 billion in first-half 2007.

ISO and PCI found that partially offsetting the deterioration in underwriting and investment results, insurers' miscellaneous other income rose from negative $1.5 billion in first-half 2007 by $1.7 billion to $200 million in the first half of 2008, and insurers' federal income taxes declined to $5.4 billion from $10.7 billion.

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

Michael R. Murray, ISO's assistant vice president for financial analysis, said the insurers' 5.4 percent annualized rate of return for first-half 2008 "was the fourth-lowest first-half annualized rate of return in the past 23 years and 4.4 percentage points below insurers' 9.8 percent average first-half rate of return since the start of ISO's quarterly data in 1986."

Overall results were affected by disproportionate deterioration in results for mortgage and other financial guaranty insurers, he said.

ISO said it estimates that mortgage and financial guaranty insurers' annualized rate of return fell to negative 77.2 percent in first-half 2008 from 21.6 percent in first-half 2007. Excluding mortgage and financial guaranty insurers, the insurance industry's annualized rate of return declined to 7.6 percent in first-half 2008 from 12.8 percent in first-half 2007, as the industry's net income fell 38.8 percent.

David Sampson, PCI president and chief executive officer, said the insurance industry "remains sound and well able to fulfill its obligations to policyholders."

He added, "The current turmoil in the financial market that undermined some of the nation's leading financial institutions had relatively little effect on property-casualty insurers, largely because of insurers' conservative investment practices."

The factors leading to net losses on underwriting included declines in premiums and increases in insured losses and other costs associated with providing insurance protection.

Net written premiums dropped $1.3 billion, or 0.6 percent, to $221.9 billion in first-half 2008 from $223.3 billion in first-half 2007. Net earned premiums declined $0.1 billion, or 0.1 percent, to $217.7 billion in first-half 2008 from $217.8 billion in first-half 2007.

"Mortgage and financial guaranty insurers account for a significant amount of the deterioration in underwriting results for the industry overall, but underwriting results deteriorated across the board," Mr. Murray said in a statement.

Mortgage and financial guaranty insurers' net written premiums rose 5 percent to $4.1 billion in first-half 2008, but their loss and loss adjustment expenses soared 462.2 percent to $10 billion, and their combined ratio jumped to 242.3 in first-half 2008 from 74.1 in first-half 2007, he said.

Excluding mortgage and financial guaranty insurers, industry net written premiums fell 0.7 percent, loss and loss adjustment expenses rose 8.1 percent, and the combined ratio increased to 99.2 in first-half 2008 from 93 percent in first-half 2007, according to Mr. Murray.

The industry's net investment income--primarily dividends from stocks and interest on bonds--fell $400 million, or 1.4 percent, to $25.8 billion in first-half 2008 from $26.2 billion in first-half 2007. Realized capital losses on investments (not included in net investment income) in first-half 2008 totaled $1.1 billion.

The companies said this was a $5.2 billion swing from the $4.1 billion in realized capital gains in first-half 2007. Combining net investment income and realized capital gains (losses), overall net investment gains fell $5.6 billion to $24.8 billion in the first half of 2008.