JERSEY CITY, N.J., Sept. 30, 2008 – The U.S. property/casualty insurance industry’s net income after taxes fell 57.4 percent to $13.9 billion in first-half 2008 from $32.7 billion in first-half 2007. The insurance industry’s overall profitability as measured by its annualized rate of return on average policyholders’ surplus (or statutory net worth) dropped to 5.4 percent in first-half 2008 from 13.1 percent in first-half 2007, as underwriting results and investment results deteriorated.
Insurers suffered $5.6 billion in net losses on underwriting in first-half 2008 – a $20.2 billion adverse swing from insurers’ $14.5 billion in net gains on underwriting in first-half 2007. The combined ratio – a key measure of losses and other underwriting expenses per dollar of premium – worsened to 102.1 percent in the first half of this year from 92.7 percent in the first half of 2007, according to ISO and the Property Casualty Insurers Association of America (PCI).
Insurers’ net investment gains – the sum of net investment income and realized capital gains (or losses) on investments – fell 18.4 percent to $24.8 billion in first-half 2008 from $30.3 billion in first-half 2007.
Partially offsetting the deterioration in underwriting and investment results, insurers’ miscellaneous other income rose $1.7 billion to $0.2 billion in the first half of 2008 from negative $1.5 billion in first-half 2007, and insurers’ federal income taxes declined to $5.4 billion from $10.7 billion.
The figures are consolidated estimates for all private property/casualty insurers based on reports accounting for at least 96 percent of all business written by private U.S. property/casualty insurers.
“Insurers’ 5.4 percent annualized rate of return for first-half 2008 was the fourth-lowest first-half annualized rate of return in the past 23 years and 4.4 percentage points below insurers’ 9.8 percent average first-half rate of return since the start of ISO’s quarterly data in 1986,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “But results for the insurance industry overall were affected by disproportionate deterioration in results for mortgage and other financial guaranty insurers. ISO estimates that mortgage and financial guaranty insurers’ annualized rate of return fell to negative 77.2 percent in first-half 2008 from 21.6 percent in first-half 2007. Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return declined to 7.6 percent in first-half 2008 from 12.8 percent in first-half 2007, as the industry’s net income fell 38.8 percent.”
“The insurance industry remains sound and well able to fulfill its obligations to policyholders,” said David Sampson, PCI president and chief executive officer. “The current turmoil in the financial market that undermined some of the nation’s leading financial institutions had relatively little effect on property/casualty insurers, largely because of insurers’ conservative investment practices. Even with a deterioration in property/casualty insurers’ financial results in the first half of the year, consumers can be confident that insurance remains a strong and stable cornerstone of the economy.”
Underwriting Results
The factors leading to net losses on underwriting included declines in premiums and increases in insured losses and other costs associated with providing insurance protection.
Net written premiums dropped $1.3 billion, or 0.6 percent, to $221.9 billion in first-half 2008 from $223.3 billion in first-half 2007. Net earned premiums declined $0.1 billion, or 0.1 percent, to $217.7 billion in first-half 2008 from $217.8 billion in first-half 2007.
“At negative 0.6 percent in first-half 2008, net written premium growth was the weakest for any first half since the start of ISO’s quarterly financial data for the property/casualty industry. The previous record low for first-half premium growth was 0.1 percent in 2007, with first-half premium growth ranging as high as 13 percent in 1987,” said Murray. “Market surveys and U.S. government data indicate that escalating competition and declines in the price of insurance cut into premiums. According to the Council of Insurance Agents and Brokers’ second-quarter 2008 market survey, commercial premium rates declined 12.9 percent on average for all sizes of accounts. And as net written premiums fell in first-half 2008, the nation’s gross domestic product [GDP], which takes into account both inflation and real growth, increased 4.4 percent compared with its level a year earlier. That premiums fell as GDP grew is an indication that intensifying competition led to lower prices for most coverages in most locations.”
The 0.6 percent decline in written premium contrasts with a significant increase in loss and loss adjustment expenses. Overall net loss and loss adjustment expenses (after reinsurance recoveries) increased $19.6 billion, or 13.7 percent, to $162.4 billion in first-half 2008 from $142.8 billion in first-half 2007. Excluding catastrophe losses, ISO estimates that net loss and loss adjustment expenses increased $13.1 billion, or 9.4 percent, to $152.1 billion in first-half 2008 from $139 billion in first-half 2007.
According to ISO’s Property Claim Services (PCS) unit, catastrophes occurring in first-half 2008 caused $10.3 billion in direct insured losses to property (before reinsurance recoveries) – almost three times the $3.6 billion in direct insured losses to property due to the catastrophes occurring in first-half 2007 and nearly twice the $5.2 billion average for first-half catastrophe losses during the past ten years.
Other underwriting expenses – primarily acquisition expenses, expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes – rose $0.3 billion, or 0.6 percent, to $60.2 billion in first-half 2008 from $59.8 billion in first-half 2007.
Dividends to policyholders also increased, rising $0.1 billion to $0.7 billion in first-half 2008 from $0.6 billion in first-half 2007.
The $5.6 billion net loss on underwriting in first-half 2008 amounts to 2.6 percent of the $217.7 billion in net premiums earned during the period, whereas the $14.5 billion net gain on underwriting in first-half 2007 amounted to 6.7 percent of the $217.8 billion in net premiums earned during that period.
The 102.1 percent combined ratio for the first half of 2008 is the worst first-half underwriting result since the 105.1 percent combined ratio for the first half of 2002. But the combined ratio for first-half 2008 compares favorably with the 104 percent average for all first halves since the start of ISO quarterly data in 1986.
“But even with a better than average underwriting result for first-half 2008, insurers’ 5.4 percent annualized rate of return for the period fell well short of the rates of return typically earned by firms in other industries,” said Sampson. “With first-half 2008 investment results, financial leverage, and tax rates, ISO and the PCI estimate that the combined ratio would have had to improve to 89.8 percent in order for insurers to have earned the 14 percent long-term average rate of return for the Fortune 500. Moreover, with today’s low interest rates and investment yields, insurers must now post significantly better underwriting results just to be as profitable as they once were. For example, in first-half 1987, insurers achieved a 15 percent annualized rate of return with a combined ratio of 104.1 percent. In first-half 2008, insurers’ annualized rate of return was 9.6 percentage points lower even though the combined ratio was 2.1 percentage points better.”
“Mortgage and financial guaranty insurers account for a significant amount of the deterioration in underwriting results for the industry overall, but underwriting results deteriorated across the board,” said Murray. “Mortgage and financial guaranty insurers’ net written premiums rose 5 percent to $4.1 billion in first-half 2008; but their loss and loss adjustment expenses soared 462.2 percent to $10 billion, and their combined ratio jumped to 242.3 percent in first-half 2008 from 74.1 percent in first-half 2007. Excluding mortgage and financial guaranty insurers, industry net written premiums fell 0.7 percent, loss and loss adjustment expenses rose 8.1 percent, and the combined ratio increased to 99.2 percent in first-half 2008 from 93 percent in first-half 2007.”
Investment Results
The industry’s net investment income – primarily dividends from stocks and interest on bonds – fell $0.4 billion, or 1.4 percent, to $25.8 billion in first-half 2008 from $26.2 billion in first-half 2007. Realized capital losses on investments (not included in net investment income) in first-half 2008 totaled $1.1 billion – a $5.2 billion swing from the $4.1 billion in realized capital gains in first-half 2007. Combining net investment income and realized capital gains (losses), overall net investment gains fell $5.6 billion to $24.8 billion in the first half of 2008.
Combining the $1.1 billion in realized capital losses in first-half 2008 with $18.5 billion in unrealized capital losses during the period, insurers posted $19.6 billion in overall capital losses in the first half of 2008 – a $30 billion swing from the $10.4 billion in realized capital gains in first-half 2007.
“Fundamentally, two things determine insurers’ investment income – one being the amount of cash and invested assets held by insurers and the other being the yield on those holdings,” said Sampson. “Insurers’ investment income dropped 1.4 percent in first-half 2008 because the annualized yield on insurers’ cash and invested assets fell to 4.1 percent during the period from 4.3 percent in first-half 2007. Partially offsetting the decline in investment yields, insurers’ average holdings of cash and invested assets rose 2.1 percent in first-half 2008.”
“Insurers’ overall capital losses in first-half 2008 reflect developments in financial markets,” said Murray. “In the first half of 2008, stock prices as measured by the S&P 500 dropped 12.8 percent, with the NASDAQ Composite Index and the Dow Jones Industrial Average falling even more. With the S&P 500 having fallen 13.6 percent from June 30 through September 29, and with some insurers needing to mark down investments in securities issued by institutions affected by the problems roiling credit markets, insurers’ results for nine-months 2008 will quite probably suffer from some additional capital losses on investments. Beyond that, it all depends on future developments in financial markets.”
Pretax Operating Income
Pretax operating income – the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income – fell 48 percent to $20.4 billion in first-half 2008 from $39.3 billion in first-half 2007. The $18.9 billion decline in operating income is the net result of the $20.2 billion adverse swing to net losses on underwriting, the $0.4 billion decline in net investment income, and the $1.7 billion increase in miscellaneous other income.
Net Income after Taxes
The insurance industry’s net income after taxes fell $18.8 billion to $13.9 billion in first-half 2008 from $32.7 billion in first-half 2007. Net income would have fallen more if not for a $5.3 billion decline in federal income taxes to $5.4 billion, which partially offset the $18.9 billion decline in operating income and the $5.2 billion swing to $1.1 billion in realized capital losses on investments from $4.1 billion in realized capital gains a year earlier.
Policyholders’ Surplus
Policyholders’ surplus – insurers’ net worth measured according to Statutory Accounting Principles – dropped $12.9 billion to $505 billion at June 30, 2008, from $517.9 billion at year-end 2007. Additions to surplus in first half 2008 included insurers’ $13.9 billion in net income after taxes and $3.9 billion in new funds paid in (new capital raised by insurers). Those additions were more than offset by deductions from surplus, including $18.5 billion in unrealized capital losses on investments (not included in net income), $11.9 billion in dividends to shareholders, and $0.3 billion in miscellaneous charges against surplus.
The $3.9 billion in new funds paid in during the first six months of 2008 is up $2.3 billion from $1.6 billion in the first six months of 2007.
The $18.5 billion in unrealized capital losses in first-half 2008 contrasts with insurers’ $6.3 billion in unrealized capital gains on investments in first-half 2007.
The $11.9 billion in dividends to shareholders in the first half of 2008 is up $0.1 billion from $11.8 billion in the first half of 2007.
The $0.3 billion in miscellaneous charges against surplus in first-half 2008 compares with $2.3 billion in such charges in first-half 2007.
Second-Quarter Results
The industry’s consolidated net income after taxes for second-quarter 2008 amounted to $5.4 billion, down 66.9 percent from the $16.4 billion in net income for second-quarter 2007. Reflecting the decline in net income, property/casualty insurers’ annualized rate of return dropped to 4.3 percent in second-quarter 2008 from 13 percent a year earlier.
Excluding mortgage and financial guaranty insurers, insurers’ annualized rate of return fell to 5.8 percent from 12.9 percent, as their net income declined 54.4 percent.
The industry’s net income for second-quarter 2008 consisted of $7.9 billion in pretax operating income, less $0.7 billion in realized capital losses on investments and $1.8 billion in federal and foreign income taxes.
The industry’s second-quarter pretax operating income of $7.9 billion is down 60.2 percent from $19.8 billion in second-quarter 2007. Second-quarter 2008 operating income reflects the excess of the $13 billion in net investment income during the period over $5.1 billion in net losses on underwriting, with miscellaneous other income for second-quarter 2008 being near zero.
The $5.1 billion in net losses on underwriting in second-quarter 2008 constitutes an $11.3 billion adverse swing from the $6.2 billion in net gains on underwriting in second-quarter 2007. Contributing to the deterioration in underwriting results, direct insured losses from catastrophe losses rose to $6.8 billion in second-quarter 2008 from $2.3 billion in second-quarter 2007, according to ISO’s PCS unit.
Second-quarter 2008 net losses on underwriting amount to 4.6 percent of the $109.8 billion in premiums earned during the period, in contrast to second-quarter 2007 net gains on underwriting amounting to 5.6 percent of the $109.4 billion in premiums earned during the period.
The industry’s combined ratio deteriorated to 104.2 percent in second-quarter 2008 from 93.7 percent in second-quarter 2007. At 104.2 percent, the industry’s second-quarter combined ratio had deteriorated to its worst level since the 107.9 percent combined ratio for second-quarter 2002.
The $5.1 billion in net losses on underwriting is after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders essentially unchanged from their level in second-quarter 2007.
Written premiums fell $0.5 billion, or 0.4 percent, to $111.5 billion in second-quarter 2008 from $112 billion in second-quarter 2007. At negative 0.4 percent in second-quarter 2008, written premium growth was the second weakest for any second quarter on record, with the record low for second-quarter written premium growth being negative 0.6 percent in second-quarter 2007.
Excluding mortgage and financial guaranty insurers, net written premiums fell 0.5 percent in second-quarter 2008, as loss and loss adjustment expenses rose 11 percent and the combined ratio increased 7.6 percentage points to 101.6 percent.
“Written premiums have now declined versus year-ago levels for five successive quarters. This is absolutely unprecedented, based on ISO’s quarterly data extending back to 1986,” said Sampson. “Prior to second-quarter 2007, written premiums declined in just two quarters – fourth-quarter 1991 and third-quarter 2005. The decline in third-quarter 2005 resulted from a special transaction in which one insurer ceded $6 billion in premiums to its foreign parent, but the declines since second-quarter 2007 were a result of increasingly intense competition in many insurance markets.”
The $13 billion of net investment income is down $0.3 billion, or 2 percent, compared with investment income in second-quarter 2007.
At essentially zero in second-quarter 2008, miscellaneous other income was down $0.4 billion from its level in second-quarter 2007.
The $0.7 billion in realized capital losses in the second quarter of 2008 contrasts with the $2.1 billion in realized capital gains on investments in the second quarter of 2007.
Combining net investment income and realized capital gains, the industry posted $12.3 billion in net investment gains in second-quarter 2008, down 19.6 percent from $15.3 billion a year earlier.
Unrealized capital losses on investments in second-quarter 2008 totaled $8.3 billion, whereas insurers posted $6.2 billion in unrealized capital gains on investments in second-quarter 2007. Combining realized and unrealized capital losses, the insurance industry posted $9 billion in overall capital losses in second-quarter 2008 – a $17.2 billion adverse swing from the $8.3 billion in overall capital gains in second-quarter 2007.
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