P-C Insurer Profits Plummet By 92 Percent Through Three Quarters

Red ink stained the property-casualty insurance sector's third-quarter financial results, as the industry combined for a net loss of $9.9 billion, while profits plunged 92 percent for the full year thus far to $4.1 billion–a negative shift of over $53 billion from the $49.6 billion profit reported in 2007.

Battered by falling premium volume, bad weather and a steep decline in investment income, this year's third-quarter loss represents a whopping $26.8 billion downturn compared with a profit of $16.9 billion in the same period last year.

The industry's annualized rate of return for the quarter was negative-8 percent, compared with a positive return of 13 percent the year before.

The news wasn't much better for the first nine months, as the industry's net income nosedived 91.8 percent, according to the quarterly survey conducted by the Property Casualty Insurers Association of America and Insurance Services Office Inc.

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 last year's $18.4 billion in underwriting gains.

As a result, the industry's combined ratio deteriorated 11.8 points to 105.6, compared to 93.8 for 2007's first three quarters.

The industrywide 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-, credit- and recession-related woes, net investment gains fell 40.7 percent to $28.3 billion for the first nine months, down from $47.8 billion last year.

“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 government rescue of insurer American International Group,” along with “the largest bank failure ever–Washington Mutual” and “the collapse of the 158-year-old investment bank, Lehman Brothers.”

The combination of a down economy, a financial system in 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, he noted, the industry's nine-month 1.1 percent annualized rate of return was the second-lowest in 23 years.

However, the p-c sector as a whole is not as bad off as the results might indicate, as one troubled niche dragged industrywide experience down considerably, Mr. Murray noted. ISO estimated that the annualized rate of return for mortgage and financial guaranty insurers 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 a more respectable 4.2 percent for the first three quarters of 2008, down from 13.1 percent for 2007, with the non-guaranty industry's net income falling 68 percent.

“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.

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 p-c market, along with a slowdown in business activity as the recession deepened, took its toll on the industry's top line.

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, according to the PCI-ISO report, citing the Council of Insurance Agents and Brokers' third-quarter pricing survey, which found that commercial premium rates had declined 11 percent on average.

However, Mr. Hartwig said that despite the fact “premium growth remains in negative territory…there are some early signs of a reversal of this trend.”

Disaster claims 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 fourfold 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 a year ago, and more than twice the $12.3 billion average for nine-month cat losses during the past 20 years.

With Wall Street in turmoil, the investment markets 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.

Among the only “good” news is that insurers owed far less to Uncle Sam this year, with federal income taxes declining to $5.1 billion from $15.5 billion in 2007.