In 2009, the property and casualty insurance industry recovered from a devastating global financial crisis that had drained 12 percent from policyholder surplus and nearly erased the net income recorded the year before.
On the underwriting front, however, losses continued to grow in bread-and-butter lines such as private passenger auto, commercial general liability and workers' compensation in 2009, while net written premiums tumbled for the third straight year for all lines taken together.
Line-of-business data for the industry in the aggregate, as well as premium, loss and expense data for individual insurance companies and groups used for NU's P&C Premium Rankings (accompanying this article on pages 14-18) along with our traditional midsummer financial report, is based on statutory annual statements filed with insurance regulators. The data is compiled from the NAIC Annual Statement Database via Highline Data, a data affiliate of National Underwriter. (See related discussion, "About the Data," on page 22.)
In the aggregate, information from Highline Data (www.highlinedata.com) shows that net written premiums fell only 3.8 percent in 2009 for the industry overall, but American International Group–now known as Chartis–saw more than one-third of its premiums disappear last year.
The unusual magnitude of decline for Chartis came as the group shed several key underwriting operations–selling Hartford Steam Boiler to Munich Re, 21st Century Group and other personal auto operations to Zurich's Farmers Group, and offering AIG's prior interest in reinsurer Transatlantic to the public.
The sales pushed Chartis from second place on NU's Top 100 P&C Premium Rankings in 2008 to a fourth-place ranking for 2009, as Allstate ascended from third to second place–a position the personal lines insurer hasn't occupied since the early years of this decade.
Excluding the effects of AIG's sales of equipment breakdown insurance, personal auto insurance and reinsurance operations, net premiums for the remaining Chartis entities fell roughly 17 percent in 2009–still representing the largest premium decline posted by any of the top 20 p&c insurance groups last year.
Sitting atop the rankings, State Farm and Allstate reported little growth in 2009–with State Farm's net written premiums rising 2.1 percent and Allstate's falling 2.3 percent–as they dominated a personal lines segment in which premiums were flat for the industry overall.
While personal lines net written premiums for the industry held steady at $216 billion in 2009, commercial lines premiums fell 6.8 percent overall to roughly $173 billion, with some individual commercial lines showing double-digit declines. Among the notable examples were workers' comp, where industrywide net premiums fell 12.7 percent in 2009, and commercial auto physical damage, which showed a 10.6 percent drop.
(Editor's Note: In addition to workers' comp and commercial auto, for the purpose of calculating year-over-year growth for commercial lines, NU has defined commercial lines to include commercial property lines–fire and allied lines, crop, farmowners, the non-liability portion of commercial multiple peril packages, inland marine, earthquake, burglary and theft, and boiler and machinery; as well as commercial liability lines–CMP liability, ocean marine, medical malpractice, CGL, products liability and aircraft.)
AGGREGATE RECOVERY
Across all lines, industrywide net written premiums totaled $423.9 billion in 2009, compared to $440.7 billion in 2008. The 3.8 percent overall drop in industry net written premiums followed declines of 1.5 percent in 2008 and 0.3 percent in 2007, according to compilations from Highline Data.
With investment results improving, policyholder surplus grew to $521.7 billion at year-end 2009–still roughly 2 percent below the $529.8 billion level at year-end 2007, but more than 13 percent above the year-end 2008 figure of $462.1 billion.
Better results from investment operations fueled bottom-line net income, which improved to more than $30 billion in 2009 from just a few billion dollars in 2008.
As we reported last year, investment results were not the only force that brought industry net income tumbling down in 2008–a year marked by $17.9 billion of underwriting losses from two of the industry's smallest lines (financial guaranty and mortgage guaranty) and $21.8 billion of property-catastrophe losses (net of reinsurance) from Hurricane Ike and other storms. (Catastrophe loss figures used in this article were reported by the Property Claims Services unit of the Insurance Services Office.)
A year later, calmer weather and financial markets helped improve overall p&c industry underwriting results in 2009. Although underwriting activities remained unprofitable for the industry as a whole last year, $838.2 million in underwriting losses for 2009 compared very favorably to the $22 billion underwriting loss recorded for 2008.
Translating the dollar figures to combined ratios (measures of underwriting profitability that compare losses and expenses incurred to premiums earned, with results over 100 signifying underwriting losses) the overall ratio across all lines was roughly 101 in 2009–four points better than a 105 result for 2008 but nearly 10 points worse than the industry ratio for 2007.
Underwriting losses in the financial and mortgage guaranty lines added 4.0 points to the industry combined ratio in 2008 but only 1.1 points in 2009. Excluding results for these two guaranty lines from calculations in both years produces a 101 combined ratio in 2008, compared to a roughly breakeven result in 2009.
Both guaranty and catastrophe losses need to be removed to get the industry result to an underwriting profit in 2008, with the subtraction of 4.9 points of catastrophe losses producing a combined ratio of roughly 96. Similarly, removing both 2.6 points of catastrophe losses ($11.2 billion) and the guaranty line impact of 1.1 points ($4.5 billion) from the industry aggregate combined ratio produces a slightly worse result for 2009–roughly 97.
LINE-BY-LINE ANALYSIS
While last year's lower levels of catastrophe losses fueled marked improvements in property line combined ratios in 2009–such as a 12-point drop in commercial property and a 10-point drop in homeowners–combined ratios deteriorated for auto and liability lines. A 100.5 combined ratio for private passenger auto for 2009–while only 0.1 points worse than a 100.4 ratio reported for 2008–remains the worst result for the line since 2002.
While the industry recorded its second straight underwriting loss for the personal auto line in 2009, commercial auto underwriting became unprofitable for the first time in seven years last year with an overall combined ratio of 103–6.3 points worse than a 96.7 ratio reported for 2008 and just 0.8 points better than the 103.8 ratio reported in 2002, the year of the last underwriting loss in the line.
Unlike personal auto, for which the physical damage component was profitable (with a 92.4 combined ratio) and the liability piece was unprofitable (with a 105.8 combined ratio), for commercial auto both the liability and physical damage coverage parts came in at the same unprofitable combined ratio level–103–in 2009.
The commercial auto liability combined ratio deteriorated nearly 6.0 points from a 2008 result of just over 97, while the commercial auto physical damage combined ratio was more than 8.0 points worse in 2009 than it was in 2008.
Rising combined ratios were evident in most non-auto liability lines as well, such as general liability and workers' comp, with the GL 2009 combined ratio rising nearly 12 points to 105.5, and workers' comp moving up more than six points to 107.9 last year.
For the liability lines analyzed together (private passenger auto liability, commercial auto liability, medical malpractice, workers' comp, other liability and products liability), the combined ratio for 2009 was nearly 105, compared to a breakeven 100 for 2008.
Less than half of the deterioration can be explained by a lower level of liability reserve takedowns during 2009 for prior accident years. During 2009, prior-year reserve takedowns of $2.7 billion shaved only 1.4 points off the 2009 calendar-year loss and combined ratios. In 2008, $7.4 billion in prior-year reserve takedowns for liability lines took 3.6 points off the overall combined ratio for these lines.
THE CHARTS:
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