Property/casualty insurers remained profitable in 2008 despite taking hits from several catastrophes, the recession and the ongoing financial crisis. P/C insurers earned $2.4 billion in net income after taxes in 2008, but profits and profitability both tumbled as catastrophe losses, the recession, and the crisis in the financial system took a toll on underwriting and investment results.
The P/C industry’s $2.4 billion in net income after taxes last year was down $60.1 billion, or 96.2 percent, from $62.5 billion in 2007. And reflecting the decline in net income, the insurance industry’s overall rate of return on average policyholders’ surplus dropped to 0.5 percent in 2008 from 12.4 percent in 2007.
Insurers suffered $21.2 billion in net losses on underwriting in 2008 — a $40.5 billion adverse swing from insurers’ $19.3 billion in net gains in 2007. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — worsened to 105.1 percent last year from 95.5 percent in 2007, reports ISO and the Property Casualty Insurers Association of America (PCI).
Well Capitalized
Despite the decline in profits, the full-year 2008 financial results show that private U.S. P/C insurers remain well capitalized, posting $455.6 billion in policyholders’ surplus (or statutory net worth) at year-end 2008.
Insurers also had $555.6 billion in loss and loss adjustment expense reserves to cover the cost of settling claims that had already occurred and another $200.8 billion in unearned premium reserves set aside, bringing the total funds available to cover losses and other contingencies to just over $1.2 trillion.
Policyholders’ surplus fell $62.3 billion, or 12 percent, from $517.9 billion at year-end 2007.
Insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell 50.9 percent to $31.4 billion in 2008 from $64 billion in 2007.
The figures are consolidated estimates for all private U.S. P/C insurers based on reports accounting for at least 96 percent of all business written by such insurers.
“Insurers’ net income in 2008 would have been the lowest in more than two decades if not for the net loss the industry suffered in 2001 when terrorists destroyed the World Trade Center,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. Insurers’ 0.5 percent rate of return for 2008 was their second-lowest full-year rate of return since the start of ISO’s annual data in 1959 and 8.7 percentage points below insurers’ 9.2 percent average rate of return during the past 50 years, Murray added.
“That property/casualty insurers remained profitable in 2008 and finished the year with more than a trillion dollars available to pay claims is a remarkable testament to their risk management and conservative approach,” said David Sampson, PCI president and CEO.
Underwriting Results
Net written premiums dropped $6 billion, or 1.4 percent, to $434.6 billion in 2008 from $440.6 billion in 2007. Net earned premiums declined $0.8 billion, or 0.2 percent, to $438.1 billion last year from $438.9 billion in 2007.
“At negative 1.4 percent for 2008, net written premium growth was the weakest for any year since the start of ISO’s annual financial data for the property/casualty industry. The previous record low for annual premium growth was negative 0.6 percent in 2007, with premium growth ranging as high as 22.2 percent in 1985 and 1986,” said Murray.
As premiums declined, overall net loss and loss adjustment expenses (after reinsurance recoveries) jumped $42.2 billion, or 14.2 percent, to $339.2 billion in 2008 from $297 billion in 2007. ISO estimates that the net catastrophe losses included in insurers’ financial results increased to $21.8 billion last year from $6.9 billion in 2007. Excluding estimated net catastrophe losses, loss and loss adjustment expenses increased $27.4 billion, or 9.4 percent, to $317.4 billion in 2008 from $290.1 billion a year earlier.
According to ISO’s Property Claim Services (PCS) unit, catastrophes occurring in 2008 caused $26 billion in direct insured losses to property (before reinsurance recoveries) — nearly four times the $6.7 billion in direct insured losses to property due to the catastrophes occurring in 2007 and almost twice the $14 billion average for catastrophe losses during the past 20 years.
Other underwriting expenses dropped 1.6 percent to $118.2 billion in 2008 from $120.1 billion in 2007.
The $21.2 billion net loss on underwriting for 2008 amounts to 4.8 percent of the $438.1 billion in net premiums earned during the year, whereas the $19.3 billion net gain on underwriting for 2007 amounted to 4.4 percent of the $438.9 billion in net premiums earned during that year.
The 105.1 percent combined ratio for 2008 is the worst full-year underwriting result since the 107.3 percent combined ratio for 2002. And the combined ratio for 2008 is one percentage point worse than the 104 percent average combined ratio since the start of ISO’s annual data in 1959.
“Underwriting results were significantly affected by catastrophe losses in 2008,” said PCI’s Sampson. Last year’s hurricane season spurred a $14.8 billion increase in net catastrophe losses to $21.8 billion. This accounts for about a third of the deterioration in underwriting results,” said Sampson.
Topics Catastrophe Carriers Profit Loss Underwriting Property Market Property Casualty
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