Industry Profits Dove Massively through First Nine Months of 2008

After-tax profits for the U.S. property and casualty industry through the first nine months of the year were $4.1 billion — a 91.8 percent decline from the $50 billion in profits earned the same period a year ago, according to ISO and the Property Casualty Insurers of America (PCI).

Insurers suffered $19.9 billion in net losses on underwriting through the first nine months of 2008, marking a $38.2 billion adverse swing from insurers’ $18.4 billion in net gains on underwriting seen in the comparable 2007 period.

The combined ratio – a key measure of losses and other underwriting expenses per dollar of premium, worsened to 105.6 percent in the first nine months of the year, down from the 93.8 percent combined ration the industry saw in the first nine months of 2007.

The figures are consolidated estimates for all private proprerty/casualty insurers based on reports accounting for at least 96 percent of all business written by private U.S. insurers.

“Insurers’ results through nine-months 2008 fell victim to a ‘perfect storm,’ as the downturn in the economy, the crisis roiling the financial system, softening in insurance markets, and weather-related catastrophe losses combined to take a toll on underwriting and investment results,” said Michael R. Murray, ISO’s assistant vice president for financial analysis.

Murray said insurers’ 1.1 percent annualized rate of return for the period was the second-lowest, nine-month annualized rate of return since the start of ISO’s quarterly data in 1986.

“That insurers remained profitable through nine-months 2008 despite multiple challenges is both a testament to their risk management and a sign that the property/casualty insurance industry remains well able to fulfill its obligations to policyholders,” said David Sampson, PCI president and chief executive officer. “Unlike the once iconic Wall Street institutions and banks brought down by the financial crisis, property/casualty insurers’ conservative investment practices and modest financial leverage have thus far assured that insurers have ample resources to pay claims. Effective state solvency regulation and the state insurance guaranty fund system are two more reasons that consumers and policymakers can rest assured that insurance remains a strong and stable cornerstone of the economy.”

The factors leading to net losses on underwriting included weakness in premiums and increases in loss and loss adjustment expenses. Net written premiums dropped $1.4 billion, or 0.4 percent, to $336 billion through nine-months 2008 from $337.4 billion through nine-months 2007. Net earned premiums rose $1.2 billion, or 0.4 percent, to $330.4 billion for the first nine months of 2008 from $329.2 billion for the first nine months of 2007.

As premiums declined, overall net loss and loss adjustment expenses (after reinsurance recoveries) jumped $39.7 billion, or 18.1 percent, to $258.8 billion through nine-months 2008 from $219.1 billion through nine-months 2007. ISO estimates that the net catastrophe losses included in insurers’ financial results increased to $21.6 billion in nine-months 2008 from $5 billion in nine-months 2007. Excluding estimated net catastrophe losses, loss and loss adjustment expenses increased $23.1 billion, or 10.8 percent, to $237.2 billion for nine-months 2008 from $214.1 billion for nine-months 2007.

According to ISO’s Property Claim Services (PCS) 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 in direct insured losses to property due to the catastrophes occurring in the first nine months of 2007 and more than twice the $12.3 billion average for nine-month catastrophe losses during the past 20 years.

Other underwriting expenses — primarily acquisition expenses, expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — were essentially unchanged at $90.5 billion for nine-months 2008 and nine-months 2007.

Source: PCI, ISO and The Insurance Information Institute