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Full-Year 2008 Results Show P/C Industry Well-Capitalized

Source: PCI


Posted on 10 Apr 2009

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Full-year 2008 financial results show that private U.S. property/casualty insurers had $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 to cover losses arising during the remaining term of policies in effect at year-end 2008, bringing the total funds available to cover losses and other contingencies to just over $1.2 trillion. Key leverage ratios, such as the premiums-to-surplus ratio, show that the property/casualty insurance industry remained well capitalized, though policyholders’ surplus fell $62.3 billion, or 12 percent, from $517.9 billion at year-end 2007.

Moreover, property/casualty insurers remained profitable in 2008, earning $2.4 billion in net income after taxes. But insurers’ 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 property/casualty insurance 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.

Contributing to the declines in insurers’ net income and overall rate of return, 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, 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 50.9 percent to $31.4 billion in 2008 from $64 billion in 2007.

Partially offsetting the deterioration in underwriting and investment results, insurers’ miscellaneous other income rose $0.9 billion to negative $0.1 billion in 2008 from negative $1 billion the year before, and insurers’ federal income taxes declined to $7.7 billion from $19.8 billion.

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

“Insurers’ results for full-year 2008 paint a picture of an industry standing strong in the face of adversity on multiple fronts. The ‘perfect storm’ that beset the industry in third-quarter 2008 continued unabated in the fourth quarter, as the downturn in the economy gathered momentum and financial markets tumbled. Yet, aside from some problems in the mortgage and financial guaranty sector, the property/casualty insurance industry emerged intact,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “But make no mistake — insurers absorbed a pounding last year. 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. 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.”

“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 chief executive officer. “Unlike the banks and Wall Street icons brought down by the financial crisis, and unlike some once mighty industrial giants that have had to turn to Washington for financial aid, property/casualty insurers have thus far been able to continue servicing policyholders without skipping a beat and without burdening taxpayers. In fact, property/casualty insurers pay taxes, provide jobs, and contribute to local economies by buying the state and municipal bonds that finance so many critical projects. And even in these trying times, uninterrupted access to property/casualty insurance plays a vital role in helping consumers obtain the financing they need to buy homes and automobiles, not to mention the businesses that would have to close their doors if they couldn’t get workers compensation, liability, or property insurance.”

The recession and credit crisis took a disproportionate toll on results for mortgage and other financial guaranty insurers. ISO estimates that mortgage and financial guaranty insurers’ annualized rate of return fell to negative 141.1 percent in 2008 from negative 13.4 percent in 2007. Excluding mortgage and financial guaranty insurers, the insurance industry’s rate of return declined to 4.2 percent for 2008 from 13.2 percent for 2007, as the industry’s net income fell 68.8 percent.

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 $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. “Market surveys and U.S. government data indicate that declining demand, escalating competition, and declines in the price of insurance cut into premiums. According to the Council of Insurance Agents and Brokers’ fourth-quarter 2008 market survey, commercial premium rates declined 6.4 percent on average for all sizes of accounts. And as net written premiums fell in 2008, the nation’s current-dollar gross domestic product [GDP], which takes into account both inflation and real growth, grew 3.3 percent.”

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 — primarily acquisition expenses, expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — dropped 1.6 percent to $118.2 billion in 2008 from $120.1 billion in 2007.

Dividends to policyholders declined, falling $0.5 billion, or 19.9 percent, to $2 billion last year from $2.4 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 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. “If net catastrophe losses had remained the same as they were in 2007, the combined ratio would have increased 6.2 percentage points to 101.7 percent last year, instead of jumping 9.6 percentage points to 105.1 percent. But as devastating as Hurricanes Gustav and Ike were, advanced computer 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 all of us — insurers, regulators, legislators, businesses, and consumers — need to take steps now to minimize the damage and negative impact on consumers that will occur 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 for 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 percent to $8.5 billion in 2008, their loss and loss adjustment expenses soared 141.2 percent to $26 billion. As a result, their combined ratio jumped to 299.3 percent in 2008 from 149.1 percent in 2007. Excluding mortgage and financial guaranty insurers, industry net written premiums fell 1.5 percent, loss and loss adjustment expenses rose 9.4 percent, and the combined ratio increased to 101 percent in 2008 from 94.6 percent in 2007.”

Investment Results

The industry’s net investment income — primarily dividends from stocks and interest on bonds — fell $3.9 billion, or 7 percent, to $51.2 billion last year from $55.1 billion in 2007. Realized capital losses on investments (not included in net investment income) in 2008 totaled $19.8 billion — a $28.7 billion swing from the $8.9 billion in realized capital gains the year before. Combining net investment income and realized capital losses, overall net investment gains fell $32.6 billion to $31.4 billion in 2008.

Combining the $19.8 billion in realized capital losses in 2008 with $52.9 billion in unrealized capital losses during the year, insurers’ overall capital losses totaled $72.7 billion in 2008 — an $81 billion adverse swing from the $8.3 billion in overall capital gains for 2007.

“Conceptually, insurers’ investment income is a result of two things — the yield on cash and invested assets, and the amount of cash and invested assets held by insurers,” said Sampson. “The 7 percent decline in investment income in 2008 reflects declines in both investment yields and insurers’ holdings of cash and invested assets. The yield on insurers’ cash and invested assets dropped to 4.2 percent last year from 4.5 percent in 2007, and insurers’ average holdings of cash and invested assets fell 1.2 percent in 2008.”

“Insurers’ overall capital losses last year reflect both developments in financial markets and insurers’ need to write-down investments that became impaired as a result of the recession, foreclosures, and the crisis in the financial system,” said Murray. “In 2008, stock prices as measured by the S&P 500 dropped 38.5 percent, with the NASDAQ and the New York Stock Exchange composite indexes each falling a little more than 40 percent. In addition, ISO estimates that insurers suffered $26.9 billion in pretax capital losses on impaired investments. Prospectively, with the S&P 500 falling another 11.7 percent in first-quarter 2009, and with the ongoing recession suggesting that some additional investments became impaired, insurers’ results for the first quarter of this year will almost certainly be marred by further capital losses on investments. Beyond that, it all depends on the economy and 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 59.2 percent to $29.9 billion in 2008 from $73.4 billion in 2007. The $43.5 billion decline in operating income is the net result of the $40.5 billion adverse swing to net losses on underwriting, the $3.9 billion decline in net investment income, and the $0.9 billion increase in miscellaneous other income.

Net Income after Taxes

The insurance industry’s net income after taxes fell $60.1 billion to $2.4 billion in 2008 from $62.5 billion in 2007. Net income would have fallen more if not for a $12.1 billion decline in federal income taxes to $7.7 billion, which partially offset the $43.5 billion decline in operating income and the $28.7 billion swing to $19.8 billion in realized capital losses on investments from $8.9 billion in realized capital gains a year earlier.

Policyholders’ Surplus and Financial Leverage

Policyholders' surplus — insurers’ net worth measured according to Statutory Accounting Principles — dropped $62.3 billion to $455.6 billion at December 31, 2008, from $517.9 billion at year-end 2007. Despite the decline in policyholders’ surplus, leverage ratios suggest that insurers remained strongly capitalized.

Leverage ratios, such as the ratio of premiums to surplus and the ratio of loss and loss adjustment expense reserves to surplus, provide simple measures of the amount of risk supported by each dollar of policyholders’ surplus. All else being equal, the lower the leverage ratios, the more likely an insurer has enough policyholders’ surplus to withstand future losses and other contingencies.

At year-end 2008, the ratio of premiums to surplus stood at 0.95, with the ratio of premiums to surplus averaging 1.52 during the past 50 years and ranging from a low of 0.84 at year-end 1998 to a high of 2.75 at year-end 1974. Similarly, the ratio of loss and loss adjustment expense reserves to surplus at year-end 2008 was 1.22, with that ratio averaging 1.43 during the 50 years ending 2008 and ranging from a low of 0.59 at year-end 1961 to a high of 2.13 at year-end 1974.

Additions to surplus in 2008 included insurers’ $2.4 billion in net income after taxes, $11.2 billion in new funds paid in (new capital raised by insurers), and $0.3 billion in miscellaneous other surplus changes. Those additions were more than offset by deductions from surplus, including $52.9 billion in unrealized capital losses on investments (not included in net income) and $23.3 billion in dividends to shareholders.

The $11.2 billion in new funds paid in during 2008 is up $8 billion from $3.2 billion in 2007.

The $52.9 billion in unrealized capital losses in 2008 is $52.2 billion more than insurers’ $0.6 billion in unrealized capital losses on investments in 2007.

The $23.3 billion in dividends to shareholders in 2008 is down $8.9 billion, or 27.7 percent, from $32.2 billion in 2007.

The $0.3 billion in miscellaneous additions to surplus in 2008 compares with $1.2 billion in miscellaneous charges against surplus in 2007.

Fourth-Quarter Results

The insurance industry suffered a $1.7 billion net loss after taxes in fourth-quarter 2008 — a $14.6 billion adverse swing from the industry’s $12.9 billion in net income after taxes in fourth-quarter 2007. Reflecting the net loss after taxes, insurers’ annualized rate of return dropped to negative 1.4 percent in fourth-quarter 2008 from 9.9 percent a year earlier.

Excluding mortgage and financial guaranty insurers, insurers’ annualized fourth-quarter rate of return fell to 4.3 percent in 2008 from 13.1 percent in 2007, as their net income dropped 70.3 percent.

The industry’s net loss for fourth-quarter 2008 consisted of $11 billion in pretax operating income, less $10.1 billion in realized capital losses on investments and $2.6 billion in federal and foreign income taxes.

The industry’s $11 billion in pretax operating income in fourth-quarter 2008 is down $5.4 billion, or 32.7 percent, from the $16.4 billion in pretax operating income in fourth-quarter 2007. Fourth-quarter 2008 pretax operating income reflects the excess of $13.1 billion in net investment income over $1.3 billion in net losses on underwriting and negative $0.8 billion in miscellaneous other income.

The $1.3 billion in net losses on underwriting in fourth-quarter 2008 constitutes a $2.3 billion adverse swing from the $0.9 billion in net gains on underwriting in fourth-quarter 2007. Contributing to the deterioration in underwriting results, overall loss and loss adjustment expenses rose $2.5 billion, or 3.2 percent, to $80.4 billion in fourth-quarter 2008 from $77.9 billion in fourth-quarter 2007. Excluding estimated net catastrophe losses, loss and loss adjustment expenses increased $3.8 billion, or 5 percent, to $79.8 billion in the fourth quarter of 2008 from $76 billion a year earlier.

Direct insured losses from catastrophes fell to $0.3 billion in fourth-quarter 2008 from $1.9 billion in fourth-quarter 2007, according to ISO’s PCS unit.

Fourth-quarter 2008 net losses on underwriting amount to 1.2 percent of the $107.7 billion in premiums earned during the period, in contrast to fourth-quarter 2007 net gains on underwriting amounting to 0.9 percent of the $109.8 billion in premiums earned during the period.

The industry’s combined ratio deteriorated to 103.6 percent in fourth-quarter 2008 from 100.9 percent in fourth-quarter 2007. The fourth-quarter combined ratio last rose to 103.6 percent in 2005, when Hurricane Wilma struck.

The $1.3 billion in net losses on underwriting is after deducting $0.9 billion in premiums returned to policyholders as dividends, with dividends to policyholders down from $1.3 billion in fourth-quarter 2007.

Written premiums fell $4.5 billion, or 4.4 percent, to $98.6 billion in fourth-quarter 2008 from $103.2 billion in fourth-quarter 2007. At negative 4.4 percent in fourth-quarter 2008, written premium growth was the weakest for any fourth quarter since the start of ISO’s quarterly premium growth records in 1986, with the previous record lows for fourth-quarter premium growth being negative 2.6 percent in 2007 and negative 0.1 percent in 1991.

“Written premiums have now declined versus year-ago levels for a remarkable seven successive quarters. The declines that started in second-quarter 2007 were initially a reflection of intensifying competitive pressures in insurance markets but now also reflect the impact of the recession on the demand for insurance,” said Sampson. “Prior to this unprecedented string of declines, ISO’s quarterly data extending back to 1986 shows that written premiums declined in just two other quarters — falling 0.1 percent in fourth-quarter 1991 and 4.8 percent in third-quarter 2005 — with the decline in third-quarter 2005 resulting from a special transaction in which one insurer ceded $6 billion in premiums to its foreign parent.”

Excluding mortgage and financial guaranty insurers, net written premiums fell 4.5 percent in fourth-quarter 2008. But loss and loss adjustment expenses rose 1.7 percent compared with their level in fourth-quarter 2007, and the combined ratio increased 1.4 percentage points to 98.6 percent.

The $13.1 billion in net investment income in fourth-quarter 2008 is down $2.3 billion, or 14.9 percent, compared with investment income in fourth-quarter 2007.

Miscellaneous other income dropped to negative $0.8 billion in fourth-quarter 2008 from near zero in fourth-quarter 2007.

The $10.1 billion in realized capital losses in the fourth quarter of 2008 contrasts with $0.8 billion in realized capital gains on investments in the fourth quarter of 2007.

Combining net investment income and realized capital losses, the industry posted $3.1 billion in net investment gains in fourth-quarter 2008, down 81.2 percent from $16.2 billion a year earlier.

Unrealized capital losses on investments grew to $21.7 billion in fourth-quarter 2008 from $6.8 billion in fourth-quarter 2007. Combining realized and unrealized capital losses, the insurance industry posted $31.8 billion in overall capital losses in fourth-quarter 2008 — more than five times the $6 billion in overall capital losses in fourth-quarter 2007.

PCI is composed of more than 1,000 member companies, representing the broadest cross-section of insurers of any national trade association. PCI members write over $176 billion in annual premium, 35.9 percent of the nation’s property casualty insurance. Member companies write 43.8 percent of the U.S. automobile insurance market, 29.6 percent of the homeowners market, 32.8 percent of the commercial property and liability market, and 38.4 percent of the private workers compensation market.


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