Property/Casualty Insurance Industry’s Nine-Month Net Income and Overall Profitability Rebound from Depressed Year-Ago Levels as Claim Costs Fall

JERSEY CITY, N.J., Dec. 22, 2009 — Private U.S. property/casualty insurers’ net income after taxes rose to $16.2 billion through nine-months 2009, partially recovering from the 91.2 percent decline to $4.4 billion through nine-months 2008 from $49.6 billion through nine-months 2007. Insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus (or statutory net worth) increased to 4.5 percent in the first nine months of 2009, having previously fallen to 1.2 percent in the first nine months of 2008 from 13.1 percent in the first nine months of 2007.

Driving the increases in insurers’ net income and rate of return, net losses on underwriting fell by $16.6 billion to $3.2 billion through nine-months 2009 from $19.8 billion through nine-months 2008, as claim costs (loss and loss adjustment expenses) dropped $26.5 billion, according to ISO and the Property Casualty Insurers Association of America (PCI).

The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 100.7 percent in the first nine months of this year from 105.5 percent in the first nine months of 2008. If not for the decline in claim costs, the combined ratio would have increased 3.5 percentage points, instead of declining by 4.8 percentage points.

Partially offsetting the improvement in underwriting results, insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell 8.2 percent to $26.2 billion for nine-months 2009 from $28.5 billion for nine-months 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 7.3 percent to $490.8 billion at September 30, 2009, from $457.3 billion at year-end 2008. 

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’ 4.5 percent annualized rate of return for nine-months 2009 is nearly four times their 1.2 percent annualized rate of return for nine-months 2008, insurers’ overall rate of return for nine-months 2009 was only about half of what it usually is,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “During the 24 years from the start of ISO’s quarterly data for the insurance industry to 2009, insurers’ annualized rate of return through nine-months averaged 8.7 percent, with poor results for mortgage and financial guaranty insurers through nine-months 2009 dragging down the industry’s rate of return year-to-date.”

ISO estimates that mortgage and financial guaranty insurers’ annualized rate of return rose to negative 49.6 percent for nine-months 2009 from negative 113.8 percent for nine-months 2008. Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return rose to 5.9 percent for the first nine months of 2009 from 4.2 percent for the first nine months of 2008.

“With insurers' annualized rate of return showing some growth, the increase in policyholders’ surplus is yet another welcome sign that regulators and consumers can continue relying on the financial strength of property/casualty insurers despite lingering problems in the banking sector,” said David Sampson, PCI president and chief executive officer. “Property/casualty insurance failures remain extremely rare events but, year-to-date through December 19, regulators had seized 140 banks. Insurers’ superior performance reflects the strength of their balance sheets. Combining insurers’ $490.8 billion in policyholders’ surplus at September 30 with their $552.4 billion in loss and loss adjustment expense reserves and their $204.7 billion in unearned premium reserves, insurers had more than $1.2 trillion in funds available to fulfill their promises to consumers.” 

Underwriting Results
Underwriting results improved in the first nine months of 2009 even though premiums continued declining. Net written premiums dropped $15.1 billion, or 4.5 percent, to $321.2 billion for nine-months 2009 from $336.3 billion for nine-months 2008. Net earned premiums declined $12.8 billion, or 3.9 percent, to $317.8 billion for nine-months 2009 from $330.6 billion for nine-months 2008.

At negative 4.5 percent, net written premium growth through nine months fell to a new record low. Based on quarterly premium data extending back to 1986, the previous record lows for nine-month premium growth were negative 0.3 percent in 2008 and negative 0.2 percent in 2005, with nine-month premium growth ranging as high as 13.8 percent in 2002.

“The decline in written premiums reflects economic conditions. The latest data shows the nation’s gross domestic product [GDP], which takes into account both inflation and real growth, fell 2.0 percent in the first nine months of 2009 compared with its level a year earlier, with seasonally adjusted total private-sector employment falling 4.5 percent and private-sector wages and salaries dropping 4.9 percent. Moreover, previously released data shows sales by retailers, including restaurants and other food services, dropped 8.6 percent,” said Murray. “All of this reduces demand for insurance. And with insurers competing with one another for shares of a shrinking economic pie, market surveys indicate the recession contributed to continued softening in commercial insurance markets. For example, the Council of Insurance Agents and Brokers’ third-quarter 2009 market survey indicates commercial premium rates declined an average of 5.8 percent for all sizes of accounts.”

Driving the improvement in underwriting results, insurers’ overall net loss and loss adjustment expenses (after reinsurance recoveries) fell to $231.7 billion in the first nine-months of 2009 from $258.3 billion in the first nine months of 2008. ISO estimates that the net catastrophe losses included in private insurers’ financial results declined to $10.9 billon for nine-months 2009 from $21.1 billion for nine-months 2008, even though net catastrophe losses for nine-months 2009 include some late-emerging losses from Hurricane Ike in 2008. Excluding catastrophe losses, net loss and loss adjustment expenses fell $16.3 billion, or 6.9 percent, to $220.8 billion for nine-months 2009 from $237.1 billion for nine-months 2008.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in the first nine months of 2009 caused $10.3 billion in direct insured losses to property (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers) — down $16.5 billion from the direct insured losses to property due to the catastrophes striking the United States in the first nine months of 2008 and $6.9 billion less than the $17.2 billion average for nine-month direct catastrophe losses during the past ten years.

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 $2.8 billion, or 3.1 percent, to $88.3 billion in nine-months 2009 from $91.1 billion in nine-months 2008.

Dividends to policyholders through nine-months 2009 amounted to $1 billion, essentially unchanged from dividends to policyholders through nine-months 2008.

The $3.2 billion net loss on underwriting for nine-months 2009 amounts to 1 percent of the $317.8 billion in net premiums earned during the period, whereas the $19.8 billion net loss on underwriting for nine-months 2008 amounted to 6 percent of the $330.6 billion in net premiums earned during that period.

“While the 100.7 percent combined ratio for nine-months 2009 compares favorably with the 104.8 percent average combined ratio for the first nine months of every year since 1986, 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, for nine-months 1986, insurers achieved a 14.9 percent annualized overall rate of return with a combined ratio of 108 percent. For nine-months 2009, insurers’ annualized rate of return was just 4.5 percent, even though the combined ratio was 7.3 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 27.1 percent to $4.9 billion for the first nine months of 2009. But their loss and loss adjustment expenses fell 46.1 percent to $9.3 billion, and their combined ratio improved to 175 percent for nine-months 2009 from 276.2 percent for nine-months 2008. Excluding mortgage and financial guaranty insurers, industry net written premiums fell 4 percent, loss and loss adjustment expenses dropped 7.7 percent, and the combined ratio receded to 99.3 percent for nine-months 2009 from 101.8 percent for nine-months 2008.”

Investment Results
The industry’s net investment income — primarily dividends from stocks and interest on bonds — dropped $2.4 billion, or 6.3 percent, to $35.8 billion through nine-months 2009 from $38.3 billion through nine-months 2008. Realized capital losses on investments (not included in net investment income) dipped to $9.6 billion in the first nine months of 2009 from $9.7 billion in the first nine months of 2008. Combining net investment income and realized capital losses, overall net investment gains fell $2.3 billion, or 8.2 percent, to $26.2 billion for nine-months 2009.

Combining the $9.6 billion in realized capital losses through nine-months 2009 with $15 billion in unrealized capital gains during the period, insurers posted $5.3 billion in overall capital gains through nine-months 2009 — a $46.1 billion swing from the $40.8 billion in overall capital losses on investments through nine-months 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 6.3 percent in nine-months 2009 because the annualized yield on insurers’ cash and invested assets fell to 4 percent during the period from 4.1 percent a year earlier and because insurers’ average holdings of cash and invested assets dropped 3.6 percent.”

“With the S&P 500 rising 17 percent from year-end 2008 to September 30, the NASDAQ composite climbing 34.6 percent during the same period, and both the Dow Jones Industrial Average and the New York Stock Exchange composite also posting double-digit percentage increases year-to-date through September, insurers’ overall capital gains through nine-months 2009 are well below those that might have been expected,” said Murray. “Digging more deeply into the data, ISO found that insurers’ $5.3 billion in overall capital gains through nine-months 2009 is the net result of $13.2 billion in realized write-downs on impaired investments and $18.5 billion in gains on other investments. The $13.2 billion in realized write-downs on impaired investments through nine-months 2009 is down $0.3 billion from $13.5 billion through nine-months 2008, and only a small portion of the write-downs this year occurred in the third quarter. These 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 76 percent to $33.7 billion for nine-months 2009 from $19.2 billion for nine-months 2008. The $14.6 billion increase in operating income is the net result of the $16.6 billion decline in net losses on underwriting, the $2.4 billion decline in net investment income, and a $0.4 billion increase in miscellaneous other income to $1.1 billion for nine-months 2009 from $0.7 billion for nine-months 2008.

Mortgage and financial guaranty insurers’ operating income rose to negative $2.3 billion through nine-months 2009 from negative $10.1 billion through nine-months 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 23.3 percent to $36 billion for the first nine months of 2009 from $29.2 billion for the first nine months of 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 through nine-months 2009 totaled $16.2 billion — up $11.8 billion from $4.4 billion through nine-months 2008. The $11.8 billion increase in net income is the net result of the $14.6 billion increase in operating income, the $0.1 billion decrease in realized capital losses on investments, and a $2.8 billion increase in federal and foreign income taxes to $7.9 billion through nine-months 2009 from $5.1 billion through nine-months 2008.

Reflecting special arrangements between one insurer and its financial counterparties, mortgage and financial guaranty insurers’ net income after taxes rose to negative $4.3 billion for nine-months 2009 from negative $11.1 billion for nine-months 2008. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes increased $5 billion, or 32.1 percent, to $20.5 billion for nine-months 2009 from $15.5 billion for nine-months 2008.

Policyholders’ Surplus
Policyholders’ surplus increased $33.5 billion to $490.8 billion at September 30, 2009, from $457.3 billion at year-end 2008. Additions to surplus in the first nine months of 2009 included insurers’ $16.2 billion in net income after taxes, $15 billion in unrealized capital gains on investments (not included in income), $3.9 billion in new funds paid in (new capital raised by insurers), and $6.5 billion in miscellaneous other additions to surplus. Those additions were partially offset by $8 billion in dividends to shareholders.

The $3.9 billion in new funds paid in during the first nine months of 2009 is down $3.4 billion from $7.2 billion in the first nine months of 2008.

The $15 billion in unrealized capital gains on investments through nine-months 2009 contrasts with insurers’ $31 billion in unrealized capital losses through nine-months 2008.

The $8 billion in dividends to shareholders for nine-months 2009 is down $9.9 billion, or 55.4 percent, from $17.9 billion for nine-months 2008.

The $6.5 billion in miscellaneous additions to surplus through nine-months 2009 compares with $0.4 billion in miscellaneous deductions from surplus through nine-months 2008.

Third-Quarter Results
The industry’s consolidated net income after taxes for third-quarter 2009 amounted to $10.4 billion — a $20.2 billion swing from the industry’s $9.8 billion net loss after taxes for third-quarter 2008. Reflecting the increase in net income, property/casualty insurers’ annualized rate of return on average surplus rose to 8.7 percent in third-quarter 2009 from negative 7.9 percent a year earlier.

Mortgage and financial guaranty insurers’ annualized rate of return increased to negative 1.1 percent in third-quarter 2009 from negative 178.7 percent in third-quarter 2008, as their net income after taxes rose to near zero from negative $6.1 billion.

Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return rose to 8.9 percent in third-quarter 2009 from negative 3.1 percent in third-quarter 2008, as its net income increased to $10.4 billion from negative $3.7 billion.   

Third-quarter 2009 net income for the entire insurance industry consisted of $11.5 billion in pretax operating income and $1.5 billion in realized capital gains on investments, less $2.6 billion in federal and foreign income taxes.

The industry’s third-quarter pretax operating income of $11.5 billion is up $13 billion from negative $1.5 billion in third-quarter 2008. Third-quarter 2009 operating income consisted of $1.1 billion in net losses on underwriting, $12.3 billion in net investment income, and $0.3 billion in miscellaneous other income. Excluding mortgage and financial guaranty insurers, operating income jumped 229.6 percent to $12.3 billion in third-quarter 2009 from $3.7 billion in third-quarter 2008.

The $1.1 billion in net losses on underwriting in third-quarter 2009 compares with $14.3 billion in net losses on underwriting in third-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 $2.6 billion in third-quarter 2009 from $10.5 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 third-quarter 2009 totaled $2.6 billion, down $13.5 billion from the $16.1 billion in direct insured losses caused by catastrophes that struck in third-quarter 2008, according to ISO’s PCS unit.

Third-quarter 2009 net losses on underwriting amount to 1 percent of the $106.3 billion in premiums earned during the period, compared with third-quarter 2008 net losses on underwriting amounting to 12.6 percent of the $112.8 billion in premiums earned during the period.

The industry’s combined ratio improved to 100.5 percent in third-quarter 2009 from 112.3 percent in third-quarter 2008.

The $1.1 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 third-quarter 2008.

Written premiums fell $5.7 billion, or 5 percent, to $108.4 billion in third-quarter 2009 from $114.1 billion in third-quarter 2008. At negative 5 percent in third-quarter 2009, quarterly written premium growth had fallen to a new record low based on quarterly premium data extending back to 1986, with the previous record low being the negative 4.8 percent for second-quarter 2009.

Excluding mortgage and financial guaranty insurers, net written premiums fell 4.5 percent in third-quarter 2009, loss and loss adjustment expenses dropped 15.8 percent, and the combined ratio declined to 99.1 percent from 106.9 percent in third-quarter 2008.

“Written premiums have now declined versus year-ago levels for ten successive quarters,” said Sampson. “This extended period of decline is the result of increasingly intense competition in many insurance markets and the recession that began in December 2007. Prior to this unprecedented string of declines, ISO’s quarterly data extending back to 1986 shows that 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.”

The $12.3 billion in net investment income in third-quarter 2009 is down 0.1 percent compared with investment income in third-quarter 2008.

Miscellaneous other income dropped to $0.3 billion in third-quarter 2009 from $0.5 billion in third-quarter 2008.

The $1.5 billion in realized capital gains on investments in the third quarter of 2009 contrasts with the $8.7 billion in realized capital losses in the third quarter of 2008.

Combining net investment income and realized capital gains, the industry posted $13.8 billion in net investment gains in third-quarter 2009, up $10.2 billion from $3.6 billion a year earlier.

Unrealized capital gains on investments in third-quarter 2009 totaled $15.8 billion, whereas insurers posted $12.6 billion in unrealized capital losses on investments in third-quarter 2008. Combining realized and unrealized capital gains, the insurance industry posted $17.3 billion in overall capital gains in third-quarter 2009 — a $38.5 billion swing from the $21.2 billion in overall capital losses in third-quarter 2008.

The $17.3 billion in overall capital gains for third-quarter 2009 includes $0.4 billion in realized write-downs on impaired investments, with realized write-downs on impaired investments having fallen from $8.7 billion in third-quarter 2008.

 

OPERATING RESULTS FOR 2009 and 2008 ($ Millions)

NINE MONTHS

2009

2008

NET WRITTEN PREMIUMS

321,191

336,321

            PERCENT CHANGE (%)

(4.5)

(0.3)

NET EARNED PREMIUMS

317,776

330,560

            PERCENT CHANGE (%)

(3.9)

0.4

INCURRED LOSS & LOSS ADJUSTMENT EXPENSES

231,722

258,252

            PERCENT CHANGE (%)

(10.3)

17.9

STATUTORY UNDERWRITING GAINS (LOSSES)

(2,270)

(18,830)

POLICYHOLDERS’ DIVIDENDS

979

1,013

NET UNDERWRITING GAINS (LOSSES)

(3,249)

(19,842)

PRETAX OPERATING INCOME

33,701

19,151

NET INVESTMENT INCOME EARNED

35,843

38,258

NET REALIZED CAPITAL GAINS (LOSSES)

(9,639)

(9,726)

NET INVESTMENT GAINS

26,205

28,531

NET INCOME (LOSS) AFTER TAXES

16,164

4,350

            PERCENT CHANGE (%)

271.6

(91.2)

SURPLUS (CONSOLIDATED)

490,800

480,096

LOSS & LOSS ADJUSTMENT EXPENSE RESERVES

552,414

564,096

COMBINED RATIO, POST-DIVIDENDS (%)

100.7

105.5

 

 

 

THIRD QUARTER

2009

2008

NET WRITTEN PREMIUMS

108,366

114,115

            PERCENT CHANGE (%)

(5.0)

0.0

NET EARNED PREMIUMS

106,329

112,767

            PERCENT CHANGE (%)

(5.7)

1.3

INCURRED LOSS & LOSS ADJUSTMENT EXPENSES

77,653

96,187

            PERCENT CHANGE (%)

(19.3)

26.1

STATUTORY UNDERWRITING GAINS (LOSSES)

(763)

(13,974)

POLICYHOLDERS’ DIVIDENDS

302

283

NET UNDERWRITING GAINS (LOSSES)

(1,065)

(14,257)

PRETAX OPERATING INCOME

11,472

(1,482)

NET INVESTMENT INCOME EARNED

12,280

12,289

NET REALIZED CAPITAL GAINS (LOSSES)

1,533

(8,658)

NET INVESTMENT GAINS

13,812

3,630

NET INCOME (LOSS) AFTER TAXES

10,407

(9,780)

            PERCENT CHANGE (%)

NM*

NM*

SURPLUS (CONSOLIDATED)

490,800

480,096

LOSS & LOSS ADJUSTMENT EXPENSE RESERVES

552,414

564,096

COMBINED RATIO, POST-DIVIDENDS (%)

100.5

112.3

*Not meaningful.

   

Release: Immediate

Contacts:
Jeffrey Brewer, PCI
847-553-3763

Michael R. Murray, ISO
201-469-2339

Loretta Worters, I.I.I.
212-346-5500

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