P&C Insurers Post Worst 1st-Qtr. Loss As Economic Meltdown Takes Its Toll

The survey also showed that the industry's rate of return on surplus dropped to negative 1.2 percent for the first quarter of this year, compared to a positive return of 6.6 percent for the same period in 2008.

In terms of annualized rate of return for mortgage and financial guaranty insurers, the survey estimates their number fell to negative 149.3 percent from negative 89 percent for the same period last year.

Excluding these insurers, the insurance industry's rate of return declined to 2.2 percent from 9.5 percent for the comparative period last year.

"Based on quarterly data extending back to 1986, insurers' $1.3 billion net loss after taxes for the first three months of this year is the worst first-quarter result on record," Michael R. Murray, ISO's assistant vice president for financial analysis, said in a statement, adding that "the perfect storm that beset the insurance industry in 2008 continued unabated in first-quarter 2009."

ISO reported that net written premiums, on a comparative basis, dropped close to 4 percent, or $4 billion, to $106.4 billion, while net earned premiums declined 2 percent, or $2.3 billion, to $105.6 billion.

Mr. Murray called these results "the weakest for any first quarter since the start of ISO's quarterly data" collection that goes back more than 20 years.

Net investment income–primarily dividends from stocks and interest on bonds–fell $1.1 billion, or 8.7 percent, to $11.7 billion in the first quarter, down from $12.9 billion in first-quarter 2008.

Realized capital losses on investments (not included in net investment income) totaled $8 billion–$7.6 billion more than the $0.4 billion in realized capital losses in first-quarter 2008. "Combining net investment income and realized capital losses, overall net investment gains fell $8.7 billion to $3.7 billion for the first three months of 2009 from $12.4 billion a year earlier," the groups reported.

"Combining the $8 billion in realized capital losses in first-quarter 2009 with $16.4 billion in unrealized capital losses during the period, insurers' overall capital losses totaled $24.4 billion" through the first three months of 2009–$13.7 billion more than the $10.6 billion in overall capital losses posted the year before.

Robert P. Hartwig, president of the Insurance Information Institute, noted in his commentary on the report that there were some bright spots in the gloomy numbers.

"There are several reasons to believe that the worst might be behind the industry in terms of realized investment losses," he said.

Mr. Hartwig mentioned that insurers have shifted assets into more conservative investments. Indeed, barring "another catastrophic deterioration in the financial markets, the magnitude of write-downs on credit instruments should begin to diminish," he said–adding that in some cases insurers may be able to record increases in value going forward.

He also cited lower catastrophe losses as one of the few highlights in the grim report, coming in at $2.9 billion for the quarter–down $600 million, or 17 percent, from the same period a year ago. Mr. Hartwig added that catastrophe losses have remained tame during the second quarter of 2009.

However, PCI's president and chief executive officer, David Sampson, warned of a "genuine risk of complacency that could have disastrous consequences," urging everyone to be prepared should a mega-catastrophe strike.

"The hurricane season has just started, and it just takes one storm like Hurricane Ike or Hurricane Katrina or Hurricane Andrew to disrupt millions of lives and cause tens of billions of dollars in damage," he said. "Now is the time for all of us–insurers, regulators, legislators, businesses and consumers–to take the steps that need to be taken to make sure we'll be prepared when the next big storm hits."

While net written premium growth remained negative in the first quarter of 2009, it is not as bad as during the Great Depression, noted Mr. Hartwig.

While the industry has seen two straight years of negative written premium growth, followed by this year's first quarter–the first consecutive three-year period of decline since 1930 to 1933–the numbers are not as bad as then, he said. Citing the Institute's own estimates, Mr. Hartwig noted that from 1929 to 1933, premiums written fell by "a staggering 35 percent."

Policyholder surplus, a measure of capacity, decreased by 12 percent in 2008 (the first decline since 2002) and another 4.2 percent for the first quarter of 2009, noted Mr. Hartwig, while during the Great Depression surplus fell 28 percent.

"The bottom line is that the impact of the current financial crisis on p&c insurance, as bad as it is, in not even remotely close to impacts experienced during the Great Depression," said Mr. Hartwig.

"While insurers remain cautious about the economy and financial market conditions, there is guarded optimism that both will continue to improve as we move into the second half of 2009," he observed. "Fundamentally, the property and casualty insurance industry remains quite strong financially, with capital adequacy ratios remaining high relative to long-term historical averages."

Mr. Sampson also pointed out that p&c insurers are doing quite well compared to other financial services sectors.

"With so many once iconic banks, Wall Street institutions and industrial giants having been done in by the recession and the crisis that swept through the financial system…policyholders can be secure in the knowledge that p&c insurers have the financial resources to fulfill their obligations," said Mr. Sampson.

"Even as other financial services providers succumbed to the recession and financial crisis, property and casualty insurers' conservative investment strategies and prudent risk management enabled them to continue quietly going about their business–underwriting policies, paying claims, providing millions of jobs, and buying the state and municipal bonds that finance critical projects all across the nation, and all without burdening taxpayers," he concluded.