In addition to the near-bankruptcy of American International Group, 2008 will stand out as a year when turmoil in global financial markets cut the property and casualty insurance industry's investment gains in half, pulling down net income and taking a 12 percent slice out of the industry's aggregate surplus level.
Investment results, however, were not the only force that brought industry net income tumbling to just a few billion dollars from over $60 billion in 2007. The year was also marked by underwriting losses–which in many lines interrupted long periods of underwriting profitability.
By now, it's well known that two of the industry's smallest lines–financial guaranty and mortgage guaranty–were responsible for the bulk of the underwriting losses.
These lines–accounting for $8.5 billion in net written premiums and generating $17.9 billion of underwriting losses tied to the subprime mortgage crisis–had previously produced an average combined ratio of less than 60.0 over a period of a dozen years.
The combined ratio–a measure of underwriting profitability that compares losses and expenses incurred to premiums earned–came in five times higher for guaranty business last year, standing at 301.0 for the two lines together in 2008.
Less obvious is the fact that underwriting profits also eluded the industry's biggest line in 2008–private passenger automobile–where a 100.4 combined ratio marked the worst personal auto result since 2002.
While 45 of the industry's Top 100 Groups managed to post underwriting profits for all lines together last year, 87 recorded worse combined ratios in 2008 than in 2007.
The 2008 combined ratio of the industry's largest insurer–State Farm–rose 14 points over 2007, with a 115.2 ratio for 2008, representing more than $6 billion in pre-tax underwriting losses, compared to a $0.5 billion profit in 2007. Just over 50 percent of the deterioration at the largest personal lines insurer came from the homeowners line, while more than 40 percent was attributable to worse personal auto results.
Line by line, company by company, group by group, combined ratios worsened with only rare exceptions in 2008 to produce a 105.1 total for the industry overall. In dollars, the ratio translated to a $21.3 billion underwriting loss before taxes.
In contrast, the overall combined ratio for 2007 was 95.6, representing a pre-tax underwriting profit of $19.3 billion.
P&C insurers "just couldn't catch a break" in 2008, one might say, using the words recently spoken by Jerry Manuel, manager of baseball's struggling New York Mets, chalking up his team's losing streak to forces other than a lack of fundamentals as well as injuries that temporarily put his squad's all-stars out of action.
Since the initial report of the aggregate figures in early March by Highline Data (a Summit Business Media affiliate of National Underwriter), analysts have repeatedly cited two key forces to explain the p&c industry's $40 billion reversal of underwriting fortunes–the substantial guaranty losses that sidelined former multiline all-stars and monoline specialists alike, as well as record levels of natural catastrophe losses.
Further analysis of individual insurer rankings accompanying this article, and line-of-business details now available based on compilations of insurer results set forth in annual statement filings, reveal additional contributors to a bleak underwriting picture.
Here's how the numbers break down:
o Catastrophe losses:
According to the Property Claims Services unit of the Insurance Services Office Inc., catastrophe losses totaled $21.8 billion (net of reinsurance) last year. NU estimates the catastrophe losses added 4.9 points to the industry's overall combined ratio in 2008. In 2007, catastrophe losses were $14.8 billion lower, contributing just 1.6 points to the industry combined ratio.
Excluding catastrophe losses from both years brings the adjusted combined ratio down to just over 100 for 2008, while 2007 would have come in at roughly 94 in the absence of natural catastrophes.
o More than storms hit property results:
Direct catastrophe losses (before reinsurance) of $25.2 billion from Hurricane Ike and other 2008 storms were the fourth-highest total on record, falling well short of the $62.3 billion tallied in 2005 for storms that included Katrina, but the industry's 2008 combined ratios for property lines managed to eclipse 2005 levels.
For homeowners, the 2008 combined ratio was 115.4, up from 93.9 in 2007 and nearly 10 points higher than the 105.1 ratio recorded in 2005. For commercial property, the 2008 combined ratio was 100.8, compared to 79.8 in 2007 and 97.3 in 2005.
o Guaranty impact:
Underwriting losses in the financial and mortgage guaranty lines added 4.0 points to the industry combined ratio in 2008 and only 0.7 points in 2007. Excluding these losses in both years produces a 101 combined ratio in 2008, compared to roughly 95 in 2007.
Both guaranty and catastrophe losses need to be removed to get the industry result to an underwriting profit in 2008, but the resulting 96 combined ratio remains nearly three points worse than a similarly adjusted 2007 combined ratio.
o Bread-and-butter lines:
The combined ratio for homeowners was the worst ratio recorded since the industry result came in 21 points above breakeven back in 2001. For personal auto liability, the clock must be turned back to 2002 to find a worse result than last year's 103.5.
The situation was similar for most non-guaranty lines, with 2008 combined ratios higher than they have been in at least five years. In fact, only two lines came in with the best combined ratio results in years–medical malpractice and other liability (and for other liability line, the result is tenuous).
A review of calendar-year (CY) combined ratios calculated from underwriting and expense exhibits of insurer annual statement reveals that the other liability line's CY 2008 combined ratio of 93.9 was more than five points better than 2007′s 99.1. The difference in the two years mainly reflects a lower loss ratio in 2008.
While CY loss ratio improvements were similar for both claims-made and occurrence components of the other liability line, an analysis of accident-year (AY) loss ratios calculated from the loss development (Schedule P) exhibits of the annual statement paints a different picture for claims-made liability policies, such as directors and officers liability and professional liability.
For any given CY, incurred losses used in loss ratio and combined ratio calculations consist of losses paid and reserves set up for claims made or occurring during that year–also known as current accident-year incurred losses–plus changes in loss reserves for claims of prior years.
For liability policies written on a claims-made basis, insurers collectively set the AY loss ratio for 2008 at 72.8 as of Dec. 31, 2008–a full six points higher than the comparable loss ratio for AY 2007 at the end of 2007. Some of the largest individual writers of D&O and E&O set their initial AY 2008 loss ratios more than 10 points higher than initial AY 2007 loss ratios, including AIG, Zurich and ACE Ltd.
For the industry overall, the last initial AY loss ratio to be set as high as AY 2008 for the claims-made other liability line was posted at the end of 1997 for AY 1997 at just over 71.
Ultimately, initial ratios set for AYs prior to 2003 in this line proved to be seriously deficient, but the opposite pattern has played out for more recent AYs.
In fact, the improved 2008 CY loss ratio reflects the significant impact of prior-year reserve changes for AYs 2003-2007 in the claims-made liability line, which together shaved nearly 12 points off the line's CY 2008 loss ratio.
o Reserve changes:
Overall, for all lines taken together, reserve takedowns did not appear to have nearly the impact they did in 2007 when analysts started to worry the industry was tapping the well of reserve redundancies too early.
In total, reserve takedowns of less than $2 billion for prior AYs shaved only 0.4 points off the 2008 CY loss and combined ratios. Nearly $12 billion of unfavorable prior-year developments in the two guaranty lines, however, masked reserve takedowns in remaining insurance lines.
Excluding the guaranty boost, the aggregate level of industry reserve takedowns amounted to $14 billion, or 3.3 CY loss ratio points. During 2007, reserve takedowns for non-guaranty lines totaled just over $9 billion, shaving only 2.1 points off 2007′s CY loss and combined ratios.
o Net premiums fall:
Premium growth escaped most insurance groups last year, with mergers and acquisitions explaining infrequent premium jumps among the Top 100. But even groups that combined forces last year, such as Liberty Mutual and Safeco, posted declines in organic growth.
Although fourth-ranked Liberty's premiums soared 29 percent including the impact of the Safeco acquisition, comparing premium totals for 2008 and 2007 for all the individual companies in both groups reveals an overall decline of 2.7 percent. (In other words, the 29 percent jump reflects the fact that Safeco is included in Liberty group totals in 2008, but not in 2007.)
Similarly, Munich Re moved up into the Top 20 in 2008 from a 30th place ranking in 2007 with the acquisition of The Midland Company fueling a 36 percent jump in premiums. Excluding that acquisition, Munich and Midland together grew just 1.8 percent.
For some lines of business, premium drops for the second-biggest insurer, AIG (the parent of insurance operating units now branded under the umbrella American International Underwriters Holdings), significantly impacted industry totals.
For example, with a 42 percent share of the U.S. aviation market in 2007, AIG's 56 percent decline in aircraft premiums meant a 25 percent plunge for the industry overall. Excluding AIG, industrywide aircraft premiums fell just 1.4 percent in 2008.
Similarly, in the other liability line, net premiums for AIG fell 20 percent, pushing industry liability premiums down more than 6 percent. Without AIG, the drop for the industry was less than 2 percent.
THE CHARTS:
The Top 20 Insurance Group Breakdown, Part 3
About The Data
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