P&C Insurers Post Far Bigger Profits Despite Shrinking Economy, Soft Market

The U.S. property and casualty industry was a lot more profitable last year despite a shrinking pie of insurable exposures and a persistently soft commercial market, but insurers still have a long way to go to hit the highs they experienced just prior to the economic meltdown, a survey of carrier results reveals.

Net income for 2009 rose ninefold for the year, closing at $28.3 billion, compared to slightly more than $3 billion in 2008, according to figures released by the Insurance Services Office and the Property Casualty Insurers Association of America.

However, thanks to the economic crisis, the industry fell well short of its profit figures from 2007, when it posted net income for the year of $62.5 billion, the groups noted.

The industry's overall rate of return on average policyholders' surplus rose to 5.8 percent last year, compared to just 0.6 percent in 2008. But 2009's return was less than half the 12.4 percent figure recorded back in 2007.

“Although insurers' 5.8 percent rate of return for 2009 was nearly 10-times their 0.6 percent rate of return for 2008, insurers' overall rate of return remained below its long-term average,” Michael R. Murray, ISO's assistant vice president for financial analysis, said in a statement.

“During the 51 years from the start of ISO's annual data for the insurance industry to 2009, insurers' rate of return averaged 9.1 percent,” he noted. “The industry's subpar performance last year reflects a combination of negative rates of return for mortgage and financial guaranty insurers and modest single-digit rates of return for other insurers.”

ISO's survey includes consolidated estimates for all p&c insurers based on reports accounting for at least 96 percent of all business written by private U.S. carriers.

Driving the industry's improved performance in 2009 was an $18.1 billion drop in net losses on underwriting to $3.1 billion. A big part of that improvement was attributed to a lighter catastrophe season.

ISO's Property Claim Services unit reported that catastrophes striking the United States in 2009 caused $10.6 billion in direct insured losses (before reinsurance recoveries) for all carriers (including residual market insurers and foreign carriers and reinsurers)–which is $16.5 billion less than in 2008, and $8.8 billion below the $19.3 billion average for direct catastrophe losses during the past decade.

Dramatically lower underwriting losses prompted a four-point improvement in the combined ratio, down to just above breakeven at 101 in 2009, compared to 105 the year before.

However, PCI's president and chief executive officer, David Sampson, pointed out that “while the 101 percent combined ratio for 2009 compares favorably with the 104 percent average combined ratio for the 50 years from 1959 to 2008, 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.”

For example, he noted that in 1986, insurers achieved a 15.1 percent overall rate of return with a combined ratio of 108.1, while in 2009, insurers' annualized rate of return was just 5.8 percent, even though the combined ratio was seven points better.

A boost in investment gains helped grow the industry's bottom line–up 23 percent, or $7.3 billion, to $39 billion in 2009.

On the other hand, with millions laid off last year, and businesses either downsizing their operations or closing up for good, insurable exposures were substantially off. As a result, the report noted that net written premiums fell for a third consecutive year for the first time since The Great Depression–down 3.7 percent to $419 billion in 2009.

The drop reflected the “lingering aftereffects of the recession and the crisis in the financial system,” said Mr. Murray.

Citing drops in the nation's gross domestic product, employment, salaries, retail and service sales, Mr. Murray noted that “all of this reduces demand for insurance. And with insurers battling one another for shares of a smaller economic pie, market surveys indicate the recession contributed to softening in commercial insurance markets,” driving down written premiums even further.

Looking ahead, these trends are lingering, according to Mr. Murray, who said that “after declining by similar amounts in the first two months of 2010, commercial insurance markets may still be softening.”

Insurance Information Institute President Robert P. Hartwig said the results “provide solid evidence of a substantial and sustained rebound in profitability for p&c insurers in the wake of the financial crisis that began in mid-2007.”

He called the magnitude and speed of the turnaround “truly remarkable given the length and depth of the crisis,” noting that “as recently as the first quarter of 2009 the industry recorded a negative rate of return.”

Indeed, for the fourth quarter of 2009, the industry recorded net income of more than $12 billion, compared to a loss of more than $1.3 billion in 2008, the survey found.

Mr. Hartwig commented that “the most extraordinary sign of recovery” for the industry was its claims-paying capacity as measured by policyholders' surplus, which increased 12 percent in the fourth quarter, rising $54.2 billion to $511.5 billion compared to the end of 2008.

Mr. Hartwig said this was important because by the second quarter of 2007, surplus had peaked at $522 billion, before plunging to $437 billion at the trough of the economic crisis.

“The bottom line is that p&c insurance industry capacity came within 2 percent of its all-time record high just nine months after reaching its crisis low,” he noted. “Given continued favorable market conditions in the first quarter of 2010, it is quite likely that industry capacity reached a new record high, despite lingering difficulties in the overall economy.”

Mr. Hartwig pointed out that “one commonly used measure of capital adequacy–the ratio of net premiums written to surplus–is at its strongest level in modern history.”

PCI's Mr. Sampson said that “the increases in property-casualty insurers' income, rate of return and policyholders' surplus leave them well positioned to fulfill their obligations to policyholders and provide the insurance coverage necessary to fuel the economic recovery.”

He added that “while attention has been focused on consumers' ability to obtain mortgages and on businesses' access to credit, people would not be able to buy homes or autos, and businesses would not be able to operate, without the property and casualty industry.”