U.S. P/C Industry Achieves a Small Profit Through Nine-Months 2008 Despite Significant Deterioration in Underwriting and Investment Results: ISO

JERSEY CITY, N.J., Dec. 16, 2008 – The U.S. property/casualty insurance industry’s net income after taxes through nine-months 2008 amounted to $4.1 billion, down 91.8 percent from $50 billion through nine-months 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 1.1 percent for nine-months 2008 from 13.1 percent for nine-months 2007, as underwriting results and investment results deteriorated.

Insurers suffered $19.9 billion in net losses on underwriting through nine-months 2008 – a $38.2 billion adverse swing from insurers’ $18.4 billion in net gains on underwriting through nine-months 2007. 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 this year from 93.8 percent in the first nine months 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 40.7 percent to $28.3 billion for nine-months 2008 from $47.8 billion for nine-months 2007.

Partially offsetting the deterioration in underwriting and investment results, insurers’ miscellaneous other income rose $1.7 billion to $0.7 billion through nine-months 2008 from negative $1 billion through nine-months 2007, and insurers’ federal income taxes declined to $5.1 billion from $15.5 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’ 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. “Insurers’ 1.1 percent annualized rate of return for nine-months 2008 was the second-lowest nine-month annualized rate of return since the start of ISO’s quarterly data in 1986 and 7.8 percentage points below insurers’ 8.8 percent average nine-month rate of return during the past 23 years. But the recession and credit crisis led to 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 130.6 percent for nine-months 2008 from 14.1 percent for nine-months 2007. Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return declined to 4.2 percent for nine-months 2008 from 13.1 percent for nine-months 2007, as the industry’s net income fell 68 percent.”

“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.”

Underwriting Results

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.

“At negative 0.4 percent for nine-months 2008, net written premium growth was the weakest for the first nine months of any year since the start of ISO’s quarterly financial data for the property/casualty industry. The previous record low for nine-month premium growth was negative 0.2 percent in 2005, with nine-month premium growth ranging as high as 13.8 percent in 2002,” 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’ third-quarter 2008 market survey, commercial premium rates declined 11 percent on average for all sizes of accounts. And as net written premiums fell in the first nine months of 2008, the nation’s current-dollar gross domestic product [GDP], which takes into account both inflation and real growth, increased 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.”

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.

Dividends to policyholders declined, falling $0.2 billion, or 14.1 percent, to $1 billion for nine-months 2008 from $1.2 billion for nine-months 2007.

The $19.9 billion net loss on underwriting for nine-months 2008 amounts to 6 percent of the $330.4 billion in net premiums earned during the period, whereas the $18.4 billion net gain on underwriting for nine-months 2007 amounted to 5.6 percent of the $329.2 billion in net premiums earned during that period.

The 105.6 percent combined ratio for the first nine months of 2008 is the worst nine-month underwriting result since the 114.4 percent combined ratio for the first nine months of 2001, when the terrorist attack on the World Trade Center led to a spike in catastrophe losses. And the combined ratio for nine-months 2008 is 0.6 percentage points worse than the 105 percent average nine-month combined ratio since the start of ISO quarterly data in 1986.

“The $16.6 billion increase in net catastrophe losses to $21.6 billion through September 2008 accounts for almost half of the deterioration in underwriting results,” said Sampson. “If net catastrophe losses had remained the same as they were in nine-months 2007, the combined ratio would have increased 6.8 percentage points to 100.5 percent in nine-months 2008, instead of jumping 11.8 percentage points to 105.6 percent. But as high as catastrophe losses have been recently, state-of-the-art modeling shows that it is only a matter of time before we’re struck by a catastrophe causing $100 billion or more in insured losses. This means that all of us – insurers, regulators, legislators, businesses, and consumers – need to do what we can to make sure we’re ready when the big one hits.”

“Along with natural catastrophes, the recession and the crisis sweeping through the financial system took a toll on underwriting results through nine-months 2008, with foreclosures and other credit problems contributing to disproportionate deterioration in results for mortgage and financial guaranty insurers,” said Murray. “Though mortgage and financial guaranty insurers’ net written premiums rose 4.5 percent to $6.4 billion through nine-months 2008, their loss and loss adjustment expenses soared 352.1 percent to $17.9 billion. As a result, their combined ratio jumped to 279.4 percent for nine-months 2008 from 93.1 percent for nine-months 2007. Excluding mortgage and financial guaranty insurers, industry net written premiums fell 0.5 percent, loss and loss adjustment expenses rose 12 percent, and the combined ratio increased to 101.9 percent for nine-months 2008 from 93.8 percent for nine-months 2007.”

Investment Results

The industry’s net investment income – primarily dividends from stocks and interest on bonds – fell $1.6 billion, or 4 percent, to $38 billion for nine-months 2008 from $39.6 billion for nine-months 2007. Realized capital losses on investments (not included in net investment income) through nine-months 2008 totaled $9.7 billion – a $17.9 billion swing from the $8.2 billion in realized capital gains through nine-months 2007.

Combining net investment income and realized capital gains (losses), overall net investment gains fell $19.5 billion to $28.3 billion for the first nine months of 2008. Combining the $9.7 billion in realized capital losses through nine-months 2008 with $31.1 billion in unrealized capital losses during the period, insurers posted $40.8 billion in overall capital losses through the first nine months of 2008 – a $55.2 billion swing from the $14.3 billion in overall capital gains through nine-months 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 4 percent in the first nine months of 2008. This decline was because the annualized yield on insurers’ cash and invested assets fell to 4.1 percent during the period from 4.3 percent through nine-months 2007. Partially offsetting the decline in investment yields, insurers’ average holdings of cash and invested assets rose 0.5 percent through September 2008.”

“Insurers’ overall capital losses through nine-months 2008 reflect developments in financial markets,” said Murray. “In the first nine months of 2008, stock prices as measured by the S&P 500 dropped 20.7 percent, with the NASDAQ and the New York Stock Exchange composite indexes falling even more. With the S&P 500 falling 25.4 percent from September 30 through December 15 and with some insurers needing to mark down investments in securities impaired by the problems affecting credit markets, insurers’ results for full-year 2008 will almost certainly 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 66.9 percent to $18.9 billion for nine-months 2008 from $57 billion for nine-months 2007. The $38.1 billion decline in operating income is the net result of the $38.2 billion adverse swing to net losses on underwriting, the $1.6 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 $45.5 billion to $4.1 billion for nine-months 2008 from $49.6 billion for nine-months 2007. Net income would have fallen more if not for a $10.4 billion decline in federal income taxes to $5.1 billion, which partially offset the $38.1 billion decline in operating income and the $17.9 billion swing to $9.7 billion in realized capital losses on investments from $8.2 billion in realized capital gains a year earlier.

Policyholders’ Surplus

Policyholders’ surplus – insurers’ net worth measured according to Statutory Accounting Principles – dropped $39.4 billion to $478.5 billion at September 30, 2008, from $517.9 billion at year-end 2007. Additions to surplus through nine-months 2008 included insurers’ $4.1 billion in net income after taxes and $7 billion in new funds paid in (new capital raised by insurers). Those additions were more than offset by deductions from surplus, including $31.1 billion in unrealized capital losses on investments (not included in net income), $17.8 billion in dividends to shareholders, and $1.5 billion in miscellaneous charges against surplus.

The $7 billion in new funds paid in during the first nine months of 2008 is up $4.6 billion from $2.4 billion in the first nine months of 2007.

The $31.1 billion in unrealized capital losses through nine-months 2008 contrasts with insurers’ $6.2 billion in unrealized capital gains on investments through nine-months 2007.

The $17.8 billion in dividends to shareholders in the first nine months of 2008 is down $0.6 billion from $18.4 billion in the first nine months of 2007.

The $1.5 billion in miscellaneous charges against surplus through nine-months 2008 compares with $4.1 billion in such charges through nine-months 2007.

Third-Quarter Results

The insurance industry suffered a $9.9 billion net loss after taxes in third-quarter 2008 – a $26.7 billion adverse swing from the industry’s $16.9 billion in net income after taxes in third-quarter 2007. Reflecting the net loss after taxes, insurers’ annualized rate of return dropped to negative 8 percent in third-quarter 2008 from 13 percent a year earlier.

Excluding mortgage and financial guaranty insurers, insurers’ annualized third-quarter rate of return fell to negative 3 percent in 2008 from 13.5 percent in 2007, as their net income dropped $20.6 billion to negative $3.7 billion.

The industry’s net loss for third-quarter 2008 consisted of $1.6 billion in pretax operating losses and $8.6 billion in realized capital losses on investments, less $0.3 billion in federal and foreign income tax credits. The industry’s $1.6 billion pretax operating loss in third-quarter 2008 is a $19.2 billion swing from the $17.7 billion in pretax operating income in third-quarter 2007. The third-quarter 2008 pretax operating loss reflects the excess of $14.2 billion in net losses on underwriting over $12.2 billion in net investment income and $0.5 billion in miscellaneous other income.

The $14.2 billion in net losses on underwriting in third-quarter 2008 constitutes an $18.1 billion adverse swing from the $3.8 billion in net gains on underwriting in third-quarter 2007. Contributing to the deterioration in underwriting results, overall loss and loss adjustment expenses rose $20.1 billion, or 26.3 percent, to $96.4 billion in third-quarter 2008 from $76.3 billion in third-quarter 2007. Excluding estimated net catastrophe losses, loss and loss adjustment expenses increased $10.3 billion, or 13.8 percent, to $85.4 billion in the third quarter of 2008 from $75 billion a year earlier.

Direct insured losses from catastrophe losses rose to $14.3 billion in third-quarter 2008 from $1.3 billion in third-quarter 2007, according to ISO’s PCS unit.

Third-quarter 2008 net losses on underwriting amount to 12.6 percent of the $112.7 billion in premiums earned during the period, in contrast to third-quarter 2007 net gains on underwriting amounting to 3.4 percent of the $111.3 billion in premiums earned during the period.

The industry’s combined ratio deteriorated to 112.3 percent in third-quarter 2008 from 95.9 percent in third-quarter 2007. At 112.3 percent, the industry’s third-quarter combined ratio had deteriorated to its worst level since the 114.2 percent combined ratio for third-quarter 2005, when Hurricane Katrina contributed to record catastrophe losses.

The $14.2 billion in net losses on underwriting is after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders down from $0.6 billion in third-quarter 2007. Written premiums fell $0.1 billion, or 0.1 percent, to $114 billion in third-quarter 2008 from $114.1 billion in third-quarter 2007. At negative 0.1 percent in third-quarter 2008, written premium growth was the third weakest for any third quarter on record, surpassed only by the 0.3 percent decline in written premiums in third-quarter 2007 and the 4.8 percent decline in written premiums in third-quarter 2005.

“Written premiums have now declined versus year-ago levels for six 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 and, more recently, the weakness in the economy.”

Excluding mortgage and financial guaranty insurers, net written premiums were essentially unchanged in third-quarter 2008. But loss and loss adjustment expenses rose 19.4 percent compared with their level in third-quarter 2007, and the combined ratio increased 11.6 percentage points to 106.9 percent.

The $12.2 billion in net investment income in third-quarter 2008 is down $1.2 billion, or 9 percent, compared with investment income in third-quarter 2007.

At $0.5 billion in third-quarter 2008, miscellaneous other income was essentially unchanged from its level in third-quarter 2007.

The $8.6 billion in realized capital losses in the third quarter of 2008 contrasts with $4 billion in realized capital gains on investments in the third quarter of 2007.

Combining net investment income and realized capital losses, the industry posted $3.6 billion in net investment gains in third-quarter 2008, down 79.5 percent from $17.4 billion a year earlier.

Unrealized capital losses on investments rose to $12.6 billion in third-quarter 2008 from $0.1 billion in third-quarter 2007. Combining realized and unrealized capital losses, the insurance industry posted $21.3 billion in overall capital losses in third-quarter 2008 – a $25.1 billion adverse swing from the $3.9 billion in overall capital gains in third-quarter 2007.

About ISO

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