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P/C Industry's 2009 Results Show Strong But Incomplete Recovery from Recession, Financial Crisis

Source: ISO


Posted on 15 Apr 2010

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Private U.S. property/casualty insurers' net income after taxes rose to $28.3 billion in 2009 from $3 billion the year before. Insurers' overall profitability as measured by their rate of return on average policyholders' surplus (or statutory net worth) increased to 5.8 percent last year from 0.6 percent in 2008. But insurers' recovery from the recession and financial crisis remained incomplete, with their $28.3 billion in net income for 2009 being less than half of their $62.5 billion in net income for 2007. Similarly, insurers' 5.8 percent overall rate of return for last year was less than half of their 12.4 percent rate of return for 2007.

Driving the increases in insurers’ net income and rate of return in 2009, net losses on underwriting fell by $18.1 billion to $3.1 billion in 2009 from $21.2 billion in 2008, as claim costs (loss and loss adjustment expenses) dropped $31.3 billion, according to ISO and the Property Casualty Insurers Association of America (PCI).

Driven by the decline in claim costs, the combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 101 percent in 2009 from 105 percent in 2008.

Also contributing to the increases in insurers’ profits and profitability, their net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — rose 23.2 percent to $39 billion in 2009 from $31.7 billion in 2008.

Reflecting the industry’s net income and unrealized capital gains on investments (not included in net income), policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — rose 11.8 percent to $511.5 billion at year-end 2009 from $457.3 billion at year-end 2008. Nonetheless, surplus at year-end 2009 was down 1.2 percent compared with surplus at year-end 2007.

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.

“Though insurers’ 5.8 percent rate of return for 2009 was nearly ten times their 0.6 percent rate of return for 2008, insurers’ overall rate of return remained below its long-term average,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “During the 51 years from the start of ISO’s annual data for the insurance industry to 2009, insurers’ rate of return averaged 9.1 percent. The industry’s subpar performance last year reflects a combination of negative rates of return for mortgage and financial guaranty insurers and modest single-digit rates of return for other insurers.”

ISO estimates that mortgage and financial guaranty insurers’ rate of return on average surplus last year was negative 51.4 percent, up from negative 133.4 percent in 2008. Other property/casualty insurers’ rate of return for 2009 was 7.3 percent, up from 4.4 percent a year earlier.

“The increases in property/casualty insurers’ income, rate of return, and policyholders’ surplus leave them well positioned to fulfill their obligations to policyholders and provide the insurance coverage necessary to fuel the economic recovery. While attention has been focused on consumers’ ability to obtain mortgages and on businesses’ access to credit, people would not be able to buy homes or autos, and businesses would not be able to operate, without the property casualty industry,” said David Sampson, PCI president and chief executive officer. “Throughout the economic crisis, the property casualty industry has remained strong and stable compared to other financial services sectors, such as the banking sector which experienced 140 failed banks last year and another 42 year-to-date through April 9. These results are a testament to property casualty insurers’ strong balance sheets and prudent risk management. Combining insurers’ $511.5 billion in policyholders’ surplus at year-end 2009 with their $552.9 billion in loss and loss adjustment expense reserves and $197.5 billion in unearned premium reserves, insurers had almost $1.3 trillion in funds available to fulfill their promises to policyholders and finance new coverage.”

Underwriting Results

Overall underwriting results improved in 2009 even though premiums continued declining. Net written premiums dropped $16 billion, or 3.7 percent, to $419 billion for 2009 from $434.9 billion for 2008. Net earned premiums declined $15.4 billion, or 3.5 percent, to $422.9 billion for 2009 from $438.3 billion for 2008.

Net written premium growth has been negative for three consecutive years, with net written premium growth falling to a new record low in 2009. Data extending back to 1959 indicates that the previous record lows were negative 1.3 percent in 2008 and negative 0.6 percent in 2007 and that, prior to recent declines, net written premiums rose every year through 2006.

“The 3.7 percent decline in net written premiums last year reflects the lingering aftereffects of the recession and crisis in the financial system. The latest data shows the nation’s real gross domestic product [GDP] fell 2.4 percent in 2009, with total private-sector employment falling 5.2 percent and private-sector wages and salaries dropping 5.4 percent. Moreover, sales by retailers, including restaurants and other food services, dropped 6.3 percent,” said Murray. “All of this reduces demand for insurance. And with insurers battling one another for shares of a smaller economic pie, market surveys indicate the recession contributed to softening in commercial insurance markets. For example, the Council of Insurance Agents and Brokers’ fourth-quarter 2009 market survey indicates commercial premium rates declined an average of 5.6 percent for all sizes of accounts. And, with MartketScout reporting that its Market Barometer fell 4 percent versus year-ago levels in March after declining by similar amounts in the first two months of 2010, commercial insurance markets may still be softening.”

But insurers’ loss and loss adjustment expenses (LLAE) fell faster than premiums in 2009, leading to improvement in overall underwriting results. Overall net LLAE (after reinsurance recoveries) fell a record 9.3 percent to $306.7 billion last year from $338 billion in 2008.

About a third of the decline in net LLAE is attributable to a drop in U.S. catastrophe losses. ISO estimates that the net U.S. catastrophe losses included in private insurers’ financial results fell to $11.2 billion for 2009 from $21.8 billion for 2008, even though insurers’ net catastrophe losses for 2009 include some late-emerging losses from Hurricane Ike in 2008.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in 2009 caused $10.6 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers) — down $16.5 billion from the direct insured losses due to catastrophes that struck the United States in 2008 and $8.8 billion less than the $19.3 billion average for direct catastrophe losses during the past ten years.

Excluding catastrophe losses, net LLAE fell $20.7 billion, or 6.5 percent, to $295.5 billion for 2009 from $316.2 billion for 2008.

Also contributing to the improvement in underwriting results, other underwriting expenses — primarily acquisition expenses, expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — dropped $2.3 billion, or 1.9 percent, to $117.3 billion in 2009 from $119.6 billion in 2008. To the extent that commissions, premium taxes, and related expenses are proportionate to premiums, the decline in underwriting expenses was a result of the 3.7 percent decline in net written premiums rather than increases in efficiency.

Dividends to policyholders in 2009 amounted to $2 billion, essentially unchanged from dividends to policyholders in 2008.

The $3.1 billion net loss on underwriting for 2009 amounted to 0.7 percent of the $422.9 billion in net premiums earned during the year, whereas the $21.2 billion net loss on underwriting for 2008 amounted to 4.8 percent of the $438.3 billion in net premiums earned during that year.

“While the 101 percent combined ratio for 2009 compares favorably with the 104 percent average combined ratio for the 50 years from 1959 to 2008, today’s low interest rates and investment yields mean insurers must now post significantly better underwriting results just to be as profitable as they once were,” said Sampson. “For example, in 1986, insurers achieved a 15.1 percent overall rate of return with a combined ratio of 108.1 percent. For 2009, insurers’ annualized rate of return was just 5.8 percent, even though the combined ratio was seven percentage points better.”

“Mortgage and financial guaranty insurers continued to suffer disproportionate losses on underwriting consequent to the recession, foreclosures, and defaults on securities. But their underwriting results improved significantly, largely as a result of special arrangements between one insurer and its financial counterparties,” said Murray. “Mortgage and financial guaranty insurers’ net written premiums declined 24.9 percent to $6.6 billion for 2009. But their loss and loss adjustment expenses fell 45 percent to $13.7 billion, and their combined ratio improved to 192 percent for 2009 from 297.6 percent for 2008. Excluding mortgage and financial guaranty insurers, industry net written premiums fell 3.2 percent, loss and loss adjustment expenses dropped 6.4 percent, and the combined ratio receded to 99.3 percent for 2009 from 101 percent for 2008.”

Investment Results The industry’s net investment income — primarily dividends from stocks and interest on bonds — dropped $4.5 billion, or a record 8.7 percent, to $47 billion in 2009 from $51.5 billion in 2008. But realized capital losses on investments (not included in net investment income) fell to $8 billion in 2009 from $19.8 billion the year before. Combining net investment income and realized capital losses, overall net investment gains rose $7.3 billion, or 23.2 percent, to $39 billion last year from $31.7 billion in 2008.

Combining the $8 billion in realized capital losses in 2009 with $23.1 billion in unrealized capital gains during the year, insurers posted $15.1 billion in overall capital gains for the year — an $87.8 billion swing from the $72.7 billion in overall capital losses on investments in 2008.

“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 a record 8.7 percent in 2009 because the yield on insurers’ cash and invested assets fell to 3.9 percent during the year from 4.2 percent in 2008 and because insurers’ average holdings of cash and invested assets dropped 1 percent.”

“Insurers’ overall capital gains last year were well below what might have been expected, given that the S&P 500 rose 23.5 percent in 2009 as the New York Stock Exchange composite increased 24.8 percent and the NASDAQ composite jumped 43.9 percent,” said Murray. “Digging more deeply into the data, ISO found that insurers’ $15.1 billion in overall capital gains last year was the net result of $14.7 billion in realized write-downs on impaired investments and $29.8 billion in gains on other investments. The $14.7 billion in realized write-downs on impaired investments in 2009 was down $10.2 billion from $24.9 billion in 2008, and only a small portion of the write-downs in 2009 occurred in the second half of the year. Those developments suggest write-downs may be less of a drag on insurers’ investment results going forward.”

Pretax Operating Income

Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — rose 45.8 percent to $44.7 billion for 2009 from $30.6 billion for 2008. The $14 billion increase in operating income was the net result of the $18.1 billion decline in net losses on underwriting, the $4.5 billion decline in net investment income, and a $0.4 billion increase in miscellaneous other income to $0.8 billion in 2009 from $0.4 billion in 2008.

Mortgage and financial guaranty insurers’ operating income rose to negative $4.6 billion last year from negative $15.5 billion in 2008, primarily as a result of special arrangements between one insurer and its counterparties. Excluding mortgage and financial guaranty insurers, the insurance industry’s operating income increased 6.8 percent to $49.3 billion for 2009 from $46.1 billion for 2008.

Net Income after Taxes

Combining operating income, realized capital gains (losses), and federal and foreign income taxes, the insurance industry’s net income after taxes for 2009 totaled $28.3 billion — up $25.3 billion from $3 billion in 2008. The $25.3 billion increase in net income was the net result of the $14 billion increase in operating income, the $11.8 billion decrease in realized capital losses on investments, and a $0.6 billion increase in federal and foreign income taxes to $8.4 billion in 2009 from $7.8 billion the year before.

Reflecting special arrangements between one insurer and its financial counterparties, mortgage and financial guaranty insurers’ net income after taxes rose to negative $6.2 billion last year from negative $17.8 billion for 2008. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes increased $13.7 billion, or 65.6 percent, to $34.5 billion for 2009 from $20.8 billion for 2008. Policyholders’ Surplus

Policyholders’ surplus increased $54.2 billion to $511.5 billion at year-end 2009 from $457.3 billion at year-end 2008. Additions to surplus in 2009 included insurers’ $28.3 billion in net income after taxes, $23.1 billion in unrealized capital gains on investments (not included in income), $6.5 billion in new funds paid in (new capital raised by insurers), and $13 billion in miscellaneous other additions to surplus. Those additions were partially offset by $16.7 billion in dividends to shareholders.

The $6.5 billion in new funds paid in during 2009 was down $5.8 billion from $12.3 billion in 2008.

The $23.1 billion in unrealized capital gains on investments in 2009 contrasts with insurers’ $52.9 billion in unrealized capital losses the year before.

The $16.7 billion in dividends to shareholders last year was down $7.4 billion, or 30.5 percent, from $24.1 billion in 2008.

The $13 billion in miscellaneous additions to surplus in 2009 was up from $1.1 billion in 2008. The 2009 figure for the industry includes $4.6 billion for mortgage and financial guaranty insurers, of which $4.1 billion is attributable to releases from special contingency reserves built up during profitable years. Excluding mortgage and financial guaranty insurers, miscellaneous additions to surplus in 2009 totaled $8.4 billion, including at least $4.5 billion as a result of changes in statutory accounting rules governing the admissibility of deferred tax assets.

Fourth-Quarter Results

The industry’s consolidated net income after taxes for fourth-quarter 2009 amounted to $12.1 billion — a $13.5 billion swing from the industry’s $1.3 billion net loss after taxes for fourth-quarter 2008. Reflecting the increase in net income, property/casualty insurers’ annualized rate of return on average surplus rose to 9.7 percent in fourth-quarter 2009 from negative 1.1 percent a year earlier.

Mortgage and financial guaranty insurers’ annualized rate of return increased to negative 66.2 percent in fourth-quarter 2009 from negative 221 percent in fourth-quarter 2008, as their net income after taxes rose to negative $1.9 billion from negative $6.6 billion.

Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return rose to 11.4 percent in fourth-quarter 2009 from 4.7 percent in fourth-quarter 2008, as its net income increased to $14 billion from $5.3 billion.

Fourth-quarter 2009 net income for the entire insurance industry consisted of $11 billion in pretax operating income and $1.7 billion in realized capital gains on investments, less $0.5 billion in federal and foreign income taxes.

The industry’s fourth-quarter pretax operating income of $11 billion was down $0.5 billion from $11.5 billion in fourth-quarter 2008. Fourth-quarter 2009 operating income consisted of $0.2 billion in net gains on underwriting, $11.1 billion in net investment income, and negative $0.3 billion in miscellaneous other income. Excluding mortgage and financial guaranty insurers, operating income fell 21.7 percent to $13.2 billion in fourth-quarter 2009 from $16.9 billion in fourth-quarter 2008.

The $0.2 billion in net gains on underwriting in fourth-quarter 2009 contrasts with $1.3 billion in net losses on underwriting in fourth-quarter 2008. Contributing to the improvement in underwriting results, ISO estimates that the net catastrophe losses (after reinsurance recoveries) included in private insurers’ financial results declined to $0.2 billion in fourth-quarter 2009 from $0.6 billion a year earlier.

For all insurers (including residual market insurers and foreign insurers and reinsurers), direct insured losses from catastrophes striking the United States in fourth-quarter 2009 totaled $0.2 billion, down $0.1 billion from the $0.3 billion in direct insured losses caused by catastrophes that struck in fourth-quarter 2008, according to ISO’s PCS unit.

Fourth-quarter 2009 net gains on underwriting amounted to 0.2 percent of the $105.1 billion in premiums earned during the period, compared with fourth-quarter 2008 net losses on underwriting amounting to 1.2 percent of the $107.8 billion in premiums earned during that period.

The industry’s combined ratio improved to 101.9 percent in fourth-quarter 2009 from 103.7 percent in fourth-quarter 2008.

The $0.2 billion in net gains on underwriting was after deducting $1 billion in premiums returned to policyholders as dividends, with dividends to policyholders essentially unchanged from their level in fourth-quarter 2008.

Written premiums fell $0.8 billion, or 0.8 percent, to $97.8 billion in fourth-quarter 2009 from $98.6 billion in fourth-quarter 2008. Fourth-quarter 2009 marked the eleventh consecutive quarter of declining net written premiums for the property/casualty industry. Prior to this string of declines, analysis of quarterly data extending back to 1986 indicates net written premiums declined in just two other quarters, with net written premiums falling 4.8 percent in third-quarter 2005 and 0.1 percent in fourth-quarter 1991. The decline in third-quarter 2005 reflects a special transaction in which one insurer ceded $6 billion in premiums and the same amount of loss and loss adjustment expenses to its foreign parent.

Excluding mortgage and financial guaranty insurers, net written premiums fell 0.5 percent in fourth-quarter 2009, loss and loss adjustment expenses dropped 2.1 percent, and the combined ratio rose to 99.2 percent from 98.5 percent in fourth-quarter 2008.

The $11.1 billion in net investment income in fourth-quarter 2009 was down 15.8 percent compared with investment income in fourth-quarter 2008.

Miscellaneous other income rose to negative $0.3 billion in fourth-quarter 2009 from negative $0.4 billion in fourth-quarter 2008.

The $1.7 billion in realized capital gains on investments in the fourth quarter of 2009 contrasts with the $10.1 billion in realized capital losses in the fourth quarter of 2008.

Combining net investment income and realized capital gains, the industry posted $12.8 billion in net investment gains in fourth-quarter 2009, up $9.7 billion from $3.1 billion a year earlier.

Unrealized capital gains on investments in fourth-quarter 2009 totaled $8.1 billion, whereas insurers posted $21.8 billion in unrealized capital losses on investments in fourth-quarter 2008. Combining realized and unrealized capital gains, the insurance industry posted $9.8 billion in overall capital gains in fourth-quarter 2009 — a $41.7 billion swing from the $31.9 billion in overall capital losses in fourth-quarter 2008.

The $9.8 billion in overall capital gains for fourth-quarter 2009 included $1.5 billion in realized write-downs on impaired investments, with realized write-downs on impaired investments falling from $11.4 billion in fourth-quarter 2008.


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