Insurer Financial Results: 2008

Executive Summary

The U.S. property/casualty insurance industry’s net income after taxes plunged $60.2 billion, or 96.3%, to $2.3 billion in 2008 from $62.5 billion in 2007 and a record $65.8 billion in 2006.[1]1. This study defines the U.S. property/casualty industry as all private property/casualty insurers domiciled in the United States, including excess and surplus insurers and domestic insurers owned by foreign parents. The data in this report is based mainly on insurers’ statutory financial statements as supplied to ISO by April 24, 2009, and excludes foreign subsidiaries of U.S. insurance groups. All figures are net of reinsurance unless otherwise noted. Throughout this report, figures may not balance because of rounding. As a result, the industry’s GAAP rate of return on average net worth (RONW) — a key measure of overall profitability — fell to 0.3% in 2008 from 10.9% in 2007.[2]2.GAAP stands for Generally Accepted Accounting Principles, the accounting basis used by most industries. Unless otherwise stated, the figures in this report are based on Statutory Accounting Principles (SAP), the accounting basis used by insurers when preparing the Annual Statements they submit to state regulators. See Appendix C on page 88 for a discussion of the major differences between GAAP and SAP.

Policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — dropped $61.8 billion, or 11.9%, to $456.1 billion at year-end 2008 from a record $517.9 billion at year-end 2007. Despite the decline in policyholders’ surplus, key leverage ratios, such as the premium-to-surplus ratio, suggest that insurers remained strongly capitalized. At year-end 2008, the ratio of premiums to surplus was 0.95, up from 0.85 in 2007 but below the 1.57 average premium-to-surplus ratio from 1970 to 2008.

ISO’s analysis reveals the declines in net income and overall profitability in 2008 were directly attributable to deterioration in both underwriting and investment results. Insurers recorded $21.3 billion in net losses on underwriting last year — a $40.6 billion adverse swing from insurers’ $19.3 billion in net gains on underwriting in 2007. Insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell 50.9% to $31.4 billion in 2008 from $64.0 billion the year before.

With catastrophe losses, the recession, and the crisis in the financial system pummeling the industry, 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. And at 0.3% in 2008, insurers’ GAAP rate of return was the second lowest since at least 1971— only exceeding their –1.2% GAAP rate of return for 2001.[3]3. 1971 is the first year for which ISO has data for the property/casualty insurance industry’s GAAP rate of return on average net worth.

With insurers’ rate of return falling to a near-record low in 2008, insurers once again failed to achieve rates of return commensurate with those of firms in other industries. The Fortune 500 consists of the 500 largest industrial and service corporations in the United States. ISO estimates that, in 2008, the median GAAP rate of return on average net worth for the Fortune 500 was 14.0% — 13.7 percentage points more than the GAAP rate of return for the property/casualty insurance industry as a whole and 10.6 percentage points more than the GAAP rate of return for large insurers.[4]4. ISO estimated the median GAAP rate of return on average net worth for the Fortune 500 using the median GAAP rate of return on year-end shareholders’ equity published by Fortune magazine. This study classifies an insurer as “large” if the insurer accounts for more than 0.5% of the industry’s net written premium. In 2008, thirty-six large insurers each wrote more than $2.2 billion in premiums.

Net Income and Return on Net Worth

The industry’s $2.3 billion in net income in 2008 consisted of $29.8 billion in operating income, less $19.8 billion in realized capital losses (after taxes) on investments and $7.7 billion in income taxes.[5]5. Throughout this report, unless stated otherwise, the phrase “income taxes” and the phrase “federal income taxes” both refer to federal and foreign income taxes as shown on the Income Statements included in insurers’ statutory Annual Statements. (See Table 1.)

Operating income — the sum of net gains (losses) on underwriting, net investment income, and miscellaneous other income — fell $43.5 billion, or 59.3%, in 2008, primarily as a consequence of a $40.6 billion swing to $21.3 billion in net losses on underwriting last year from $19.3 billion in net gains on underwriting in 2007. In addition, net investment income fell $3.9 billion, or 7.0%, to $51.2 billion in 2008 from $55.1 billion in 2007. But miscellaneous other income rose $0.9 billion to –$0.1billion last year from –$1.0 billion the year before.[6]6. The –$1.0 billion in miscellaneous other income in 2007 reflects a special transaction in which one U.S. insurer assumed $9.3 billion in liabilities from a foreign entity in exchange for considerations valued at $7.1 billion, some tax benefits, and the opportunity to earn investment income on the funds held to pay down the liabilities.

The $19.8 billion in realized capital losses in 2008 compares with realized capital gains of $8.9 billion in 2007.

Partially offsetting the decline in operating income and the swing to realized capital losses, income taxes fell $12.1 billion to $7.7 billion in 2008 from $19.8 billion in 2007.

But the recession and credit crisis took a disproportionate toll on results for mortgage and other financial guaranty insurers. Mortgage and financial guaranty insurers’ net income after taxes fell to –$17.8 billion in 2008 from –$2.0 billion in 2007, causing their statutory rate of return on average policyholders’ surplus to fall to –137.9% last year from –13.4% the year before. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income declined to $20.1 billion in 2008 from $64.5 billion in 2007, causing its statutory rate of return on average policyholders’ surplus to fall to 4.2% in 2008 from 13.2% in 2007.[7]7. Statutory rates of return on average policyholders’ surplus equal statutory net income for a period divided by average policyholders’ surplus during the period. ISO compared statutory rates of return for mortgage and financial guaranty insurers with those of other insurers because ISO’s formula for calculating insurance industry GAAP rates of return may not be suitable for calculating GAAP rates of return for individual segments of the industry with distinct characteristics. Surplus for mortgage and financial guaranty insurers dropped to $11.9 billion at year-end 2008 from $14.0 billion at year-end 2007 and $15.7 billion at year-end 2006.

Further analysis reveals a long-term downward trend in insurers’ overall profitability. Using averages to smooth the effects of cycles and random shocks, the property/casualty insurance industry’s average GAAP RONW fell to 6.5% in the decade ending 2008 from 8.8% in the decade ending 1998 and 11.3% in the decade ending 1988.

Underwriting Results

The deterioration in underwriting results in 2008 reflects both weakness in premiums and growth in loss and loss adjustment expenses (LLAE).

Net written premiums fell 1.4% in 2008 to $434.5 billion from $440.6 billion in 2007. Net earned premiums also dropped, falling 0.2% in 2008 to $438.1 billion from $438.9 billion in 2007. The decline in net written premiums in 2008 was the second in as many years, with the declines in written premiums in 2008 and 2007 being the first since 1960, when ISO’s premium growth data begins. The decline in net earned premiums in 2008 was the first since 1960.

Analysis of data for the past forty years reveals a long-term slowing in premium growth. From 1969 to 2008, net written premiums rose an average of 7.3% per year. But written premium growth slowed to an average of 3.9% per year during the twenty years ending 2008 from 10.9% per year during the twenty years ending 1988. The long-term slowing in premium growth may have contributed to the long-term downward trend in insurers’ overall rates of return.

Analysis of economic and market data indicates that the weakness in premiums in 2008 was primarily a result of softening in commercial insurance markets. In particular, as net written premiums declined 1.4% in 2008, the gross domestic product of the United States increased 3.3%, suggesting that competitive pressures escalated in a number of insurance markets.[8]8. Changes in gross domestic product reflect both real growth in the economy and inflation. Moreover, ISO MarketWatch® data suggests that escalating competitive pressures took a particularly heavy toll on commercial lines premiums.[9]9. ISO MarketWatch® tracks premiums on renewals for commercial auto liability, commercial auto physical damage, products liability, premises and operations liability, businessowners, commercial fire, and commercial allied lines, by class and statistical territory. For all ISO MarketWatch lines combined, premiums on commercial renewals declined 3.4% in 2008. By line, decreases in premiums on commercial renewals ranged from 1.9% for products liability coverage to 5.7% for commercial fire.

Unlike the ISO MarketWatch data for commercial lines, U.S. government Consumer Price Indexes (CPIs) indicate that consumers paid more for personal lines coverage in 2008 than they did the year before. In 2008, the CPI for motor vehicle insurance increased 2.5%, and the CPI for tenants’ and household insurance increased 1.6%. But the increases in these CPIs failed to keep pace with increases in the costs of items covered by insurance, with the CPI for all items increasing 3.8%, the CPI for motor vehicle repair rising 4.7%, and the CPI for repair of household items climbing 5.5%.

As net written premiums declined last year, overall loss and loss adjustment expenses (LLAE) increased $40.8 billion, or 13.7%, to $337.8 billion in 2008 from $297.0 billion in 2007. An increase in catastrophe losses contributed to the increase in LLAE. ISO estimates that the net catastrophe LLAE included in insurers’ financial results increased to $22.6 billion last year from $7.2 billion in 2007. Noncatastrophe LLAE increased $25.4 billion, or 8.8%, to $315.2 billion in 2008 from $289.8 billion a year earlier.

According to ISO’s Property Claim Services® (PCS®) unit, catastrophes occurring in 2008 caused $26.2 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 catastrophes that occurred in 2007 and nearly one-and-a-half times the $17.6 billion inflation-adjusted average for the past twenty years.[10]10. The PCS® data for direct insured property losses from catastrophes cited in this study is on an accident-year basis, excludes loss adjustment expenses, and is for all insurers, including residual market insurers, as well as foreign insurers and reinsurers. The data about direct catastrophe losses is based on information available through June 4, 2009, and is subject to change as more information about the cost of settling claims from past catastrophes becomes available.

Contributing to the increase in noncatastrophe LLAE, the LLAE incurred by mortgage and other financial guaranty insurers rose $15.3 billion to $24.7 billion in 2008 from $9.4 billion in 2007. The increase in mortgage and financial guaranty insurers’ LLAE reflects increases in foreclosures, defaults, and other events triggering coverage, as a result of the recession and the crisis in the financial system. Partially offsetting the increase in mortgage and financial guaranty insurers’ LLAE, newly incurred environmental and asbestos LLAE on policies written long ago fell to $1.4 billion in 2008 from $3.1 billion in 2007.

Moreover, Fast Track data compiled by ISO and other statistical agents indicates that increases in claim severity contributed to growth in overall LLAE, at least for the personal lines.[11]11. Fast Track does not provide severity or frequency data for commercial lines. Based on Fast Track data, paid claim severity for private passenger auto bodily injury liability increased 5.9% in 2008, and homeowners paid claim severity (excluding catastrophe losses) jumped 8.4%. In addition, Fast Track data shows homeowners paid claim frequency (excluding catastrophe losses) climbed 2.0% in 2008. But paid claim frequency declined for several private passenger auto coverages.

Partially offsetting the increase in LLAE in 2008, other underwriting expenses — primarily acquisition expenses; other expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — fell $0.6 billion, or 0.5%, to $119.6 billion last year from $120.1 billion in 2007.

Dividends to policyholders also fell in 2008, dropping to $2.0 billion last year from $2.4 billion the year before.

Echoing the deterioration in underwriting results last year, the combined ratio — a key measure of losses and expenses per dollar of premium — worsened to 105.1% in 2008 from 95.5% in 2007. Though the 105.1% combined ratio in 2008 was just 0.1 percentage point higher than the average combined ratio for the forty years from 1969 to 2008, lower investment yields and financial leverage mean that combined ratios must now be better than they were in the past for insurers to achieve the same level of overall profitability they once did. For example, the industry’s 0.3% GAAP RONW for 2008 was 10.2 percentage points less than the 10.5% GAAP RONW for 1989, even though the 105.1% combined ratio for 2008 was 4.1 percentage points better than the 109.2% combined ratio for 1989.

With increases in foreclosures, defaults, and other events triggering coverage contributing to disproportionate deterioration in underwriting results for mortgage and financial guaranty insurers, their combined ratio jumped to 301.6% in 2008 from 148.1% in 2007. Excluding mortgage and financial guaranty insurers, the industry’s combined ratio increased to 101.0% in 2008 from 94.6% in 2007.

Additional ISO analyses indicate that abnormal catastrophe losses, E&A losses, and changes in the adequacy of reserves for other losses also affected insurers’ results for 2008. If not for abnormal catastrophe losses, E&A LLAE, and changes in the adequacy of reserves for other LLAE, the industry’s combined ratio would have risen 8.7 percentage points to 103.7% in 2008 from 95.0% in 2007, instead of increasing 9.6 percentage points to 105.1% from 95.5%.[12]12. For further information about the individual effects of abnormal catastrophe losses, E&A LLAE, and changes in reserve adequacy on combined ratios for the property/casualty insurance industry, see the analysis starting on page 24. When calculating adjusted combined ratios, ISO smoothed catastrophe losses, excluded E&A LLAE as defined for purposes of the Notes to Financial Statements included in the statutory Annual Statements insurers file with state regulators, and restated other losses to eliminate changes in reserve adequacy.

Adjusted for abnormal catastrophe losses, E&A LLAE, and changes in reserve adequacy, the combined ratio averaged 101.5% from 1998 to 2008 — 2.1 percentage points less than the 103.5% average combined ratio based on reported results. That is, the net effect of abnormal catastrophe losses, E&A LLAE, and changes in reserve adequacy from 1998 to 2008 was to raise combined ratios by an average of 2.1 percentage points.

Investment Income

Net investment income fell $3.9 billion to $51.2 billion in 2008 from $55.1 billion in 2007. Fundamentally, insurers’ investment income is determined by the amount of insurers’ cash and invested assets and by the yield on those assets. In 2008, investment income dropped 7.0%, as insurers’ average holdings of cash and invested assets fell 1.2% and the investment income yield on insurers’ average holdings of cash and invested assets declined to 4.2% from 4.5%. In turn, the decline in the yield on cash and invested assets reflects trends in interest rates, with the average yield on ten-year Treasury notes receding to 3.7% in 2008 from 4.6% the year before.

Further analysis reveals a long-term slowing in the growth of investment income, with the average rate of growth in investment income declining to 3.1% per year during the twenty years ending 2008 from 15.7% during the twenty years ending 1988. The long-term slowing in the growth of investment income reflects trends in insurers’ holdings of cash and invested assets. From 1989 to 2008, insurers’ average holdings of cash and invested assets rose an average of 6.0% per year — down from 11.5% per year during the previous twenty years.

The long-term slowing in the growth of investment income also mirrors trends in interest rates and associated declines in the yield on insurers’ cash and invested assets. The yield on ten-year Treasury notes averaged 5.8% during the twenty years from 1989 to 2008 — down from 9.0% during the twenty years from 1969 to 1988. The investment income yield on insurers’ cash and invested assets averaged 5.4% during the twenty years ending 2008 — down from 6.2% during the twenty years ending 1988.

Capital Gains

Combining insurers’ $19.8 billion in realized capital losses after taxes in 2008 with their $52.8 billion in unrealized capital losses after taxes, insurers posted $72.6 billion in overall capital losses after taxes last year — an $80.9 billion adverse swing from the $8.3 billion in capital gains after taxes in 2007. The swing to overall capital losses stems from developments in financial markets and write-downs on investments that became impaired as a result of the recession and the crisis in the financial system. In 2008, the S&P 500 index of common stock prices fell 38.5% — the worst annual decline in the S&P 500 since at least 1951, when ISO’s data on changes in the S&P 500 begins.[13]13. ISO obtained closing prices for the S&P 500 back to 1979 from IHS Global Insight and back to 1950 from the Financial Forecast Center, LLC. And ISO estimates that insurers posted $26.5 billion in pretax realized capital losses on impaired investments.[14]14. Statutory Annual Statements provide only pretax values for write-downs on impaired investments.

In 2008, insurers’ pretax capital losses on common stocks amounted to an estimated 30.9% of the value of common stocks held by insurers at the start of the year — 7.6 percentage points less than the decline in the S&P 500 last year. Analysis of data extending back to 1980 reveals a high correlation between changes in the S&P 500 and insurers’ capital gains on common stocks. The S&P 500 rose in twenty-two of the twenty-nine years from 1980 to 2008, and insurers posted capital gains on common stocks during each of those years. Conversely, the S&P 500 declined in seven of the twenty-nine years ending 2008, and insurers posted capital losses on common stocks in six of those years. But insurers’ capital gains on common stocks have tended to fall short of increases in the S&P 500. From 1980 to 2008, increases in the S&P 500 averaged 7.6% per year, and insurers’ pretax capital gains on common stocks averaged 7.2% of the value of their holdings at the start of each year.

Policyholders’ Surplus and Leverage

Policyholders’ surplus fell $61.8 billion, or 11.9%, to $456.1 billion at year-end 2008 from a record $517.9 billion at year-end 2007. Adjusted for inflation, surplus at year-end 2008 was 15.2% less than surplus at year-end 2007.

Additions to surplus in 2008 included $2.3 billion in net income after taxes, $11.5 billion in new funds paid in, and $0.5 billion in miscellaneous other surplus changes. Those additions were more than offset by $52.8 billion in unrealized capital losses on investments (net of changes in deferred taxes) and $23.3 billion in dividends to stockholders. (See Table 2.)

Table 2

At $11.5 billion in 2008, new funds paid in increased $8.3 billion from $3.2 billion in 2007.

The $52.8 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.

At $23.3 billion in 2008, dividends to stockholders decreased $8.9 billion, or 27.7%, from $32.2 billion in 2007.

The $0.5 billion in miscellaneous additions to surplus in 2008 compares with $1.2 billion in miscellaneous charges against surplus in 2007.

Leverage ratios, such as the premium-to-surplus ratio and the LLAE-reserves-to-surplus ratio, provide simple measures of how much risk each dollar of surplus supports. The industry’s premium-to-surplus ratio rose to 0.95 last year from a near-record-low 0.85 in 2007. The LLAE-reserves-to-surplus ratio also rose in 2008, increasing to 1.22 in 2008 from 1.03 in 2007.

Despite the increases last year, the premium-to-surplus and LLAE-reserves-to-surplus ratios both remained well below their historical peaks. And both of these leverage ratios have been subject to long-term downward trends. In particular, the premium-to-surplus ratio peaked at a record-high 2.75 in 1974, and the average premium-to-surplus ratio fell from 1.84 in the decade ending 1988 to 1.25 in the decade ending 1998 and 1.02 in the decade ending 2008. Similarly, the LLAE-reserves-to-surplus ratio peaked at a record high 2.13 in 1974, and the average LLAE-reserves-to-surplus ratio declined from 1.95 in the ten years ending 1988 to 1.70 in the ten years ending 1998 and 1.18 in the ten years ending 2008.

With premium-to-surplus and LLAE-reserves-to-surplus ratios now significantly lower than they were in the past, the industry’s ability to meet its financial obligations may have improved with the passage of time. But these simple leverage ratios are often misleading. To the extent that they are affected by changing prices in insurance markets and changes in reserve adequacy, the trends in these leverage ratios are imperfect indicators of changes in insurers’ financial condition. In addition, increases in the number and value of properties in areas exposed to hurricanes and other natural catastrophes mean that insurers must now hold more capital just to be as financially secure as they were before the buildup. Nonetheless, to the extent that the long-term declines in premium-to-surplus and LLAE-reserves-to-surplus ratios mean that insurers are holding more capital relative to the risks they have underwritten, insurers may be using capital less efficiently than they did in the past.

The ratio of cash and invested assets to surplus provides a measure of financial leverage affecting the contribution of investment income to insurers’ overall rates of return. The ratio also provides a measure of the risk to surplus from capital losses on investments. All else being equal, the higher the ratio, the bigger the contribution of investment income to insurers’ overall rate of return. Similarly, the higher the ratio of cash and invested assets to surplus, the larger the percentage decline in surplus associated with a given dollar volume of capital losses on investments.

Since hitting a record-high 4.27 in 1974, the ratio of cash and invested assets to surplus has been trending downward. The average ratio of cash and invested assets to surplus fell to 2.59 in the decade ending 2008 from 3.01 in the decade ending 1998 and 3.35 in the decade ending 1988. The decline in investment leverage since the mid-1970s and the long-term downward trend in investment income yields have reduced the contribution of investment income to insurers’ overall rates of return. However, the decline in the ratio of cash and invested assets to surplus has also reduced insurers’ risk of insolvency consequent to capital losses on investments.

Operating Cash Flow

Operating cash flow (OCF) indicates the rate at which basic underwriting and investment operations generate cash to fund new investments, dividend payments to stockholders, or other activities.[15]15. Operating cash flow is the sum of underwriting cash flow, net investment income received, and other income received, minus taxes paid.

OCF dropped to an estimated $39.2 billion in 2008 from $69.4 billion in 2007 and a record high $89.9 billion in 2004.[16]16. ISO’s OCF data extends back to 1979. The $30.1 billion decrease in OCF last year reflects a $40.8 billion decrease in net underwriting cash flow to an estimated –$1.1 billion in 2008 from $39.7 billion in 2007. Also contributing to the decrease in OCF, net investment income received fell $2.8 billion to $54.4 billion in 2008 from $57.2 billion the year before. Partially offsetting these developments, other income received rose $2.2 billion to $0.5 billion in 2008 from –$1.7 billion the year before, and income taxes paid (a cash outflow) dropped to an estimated $14.6 billion last year from $25.8 billion in 2007.

OCF ratios measure operating cash flow as a percentage of net written premiums, providing an indicator of free cash flow relative to net sales. The industry’s OCF ratio fell to an estimated 9.0% in 2008 from 15.7% in 2007.

From 1980 to 2008, the industry’s OCF ratio averaged 13.2%. But OCF ratios varied from a high of 24.2% in 1986, the peak of a historic hard market, to a low of 2.7% in 1999, when underwriting cash flow was –$25.0 billion.

Comparisons with Other Industries

In all but two of the twenty-six years from the start of ISO’s data for the Fortune 500 in 1983 to 2008, the rate of return for the Fortune 500 exceeded the rates of return for both the property/casualty insurance industry overall and large property/casualty insurers.[17]17. The exceptions were 1986 and 1987. From 1983 to 2008, the median GAAP RONW for the Fortune 500 averaged 14.0% — 5.8 percentage points more than the 8.2% average GAAP RONW for the entire property/casualty insurance industry and 5.3 percentage points more than the 8.7% average GAAP RONW for large property/casualty insurers.

Analyses in this study also compare property/casualty insurers’ profitability with that of firms in a broad array of other industries, using COMPUSTAT® data obtained from Standard & Poor’s.[18]18. Standard & Poor’s COMPUSTAT® database includes information on several hundred industries. This analysis is based on data only for the industries for which sufficient information was available for all the years in each period studied. Including industries for which sufficient information was available for only some years might have distorted the results. During the ten years from 1998 to 2007 (the latest year for which complete COMPUSTAT data was available), the GAAP RONW for the property/casualty insurance industry averaged 7.3% — 3.1 percentage points less than the 10.4% average GAAP RONW for 313 other industries. In a ranking from most to least profitable during that ten-year period, property/casualty insurance ranked 217 out of 314 industries. The results were similar when ISO lengthened the analysis to include the ten years from 1988 to 1997.

Other Analyses

Additional analyses in this study report on:

  • the performance of insurance stocks;
  • reinsurers’ results and how they compare with those of the insurance industry overall; and
  • underwriting results by line of business.

1. This study defines the U.S. property/casualty industry as all private property/casualty insurers domiciled in the United States, including excess and surplus insurers and domestic insurers owned by foreign parents. The data in this report is based mainly on insurers’ statutory financial statements as supplied to ISO by April 24, 2009, and excludes foreign subsidiaries of U.S. insurance groups. All figures are net of reinsurance unless otherwise noted. Throughout this report, figures may not balance because of rounding.

2. GAAP stands for Generally Accepted Accounting Principles, the accounting basis used by most industries. Unless otherwise stated, the figures in this report are based on Statutory Accounting Principles (SAP), the accounting basis used by insurers when preparing the Annual Statements they submit to state regulators. See Appendix C on page 88 for a discussion of the major differences between GAAP and SAP.

3. 1971 is the first year for which ISO has data for the property/casualty insurance industry’s GAAP rate of return on average net worth.

4. ISO estimated the median GAAP rate of return on average net worth for the Fortune 500 using the median GAAP rate of return on year-end shareholders’ equity published by Fortune magazine. This study classifies an insurer as “large” if the insurer accounts for more than 0.5% of the industry’s net written premium. In 2008, thirty-six large insurers each wrote more than $2.2 billion in premiums.

5. Throughout this report, unless stated otherwise, the phrase “income taxes” and the phrase “federal income taxes” both refer to federal and foreign income taxes as shown on the Income Statements included in insurers’ statutory Annual Statements.

6. The –$1.0 billion in miscellaneous other income in 2007 reflects a special transaction in which one U.S. insurer assumed $9.3 billion in liabilities from a foreign entity in exchange for considerations valued at $7.1 billion, some tax benefits, and the opportunity to earn investment income on the funds held to pay down the liabilities.

7. Statutory rates of return on average policyholders’ surplus equal statutory net income for a period divided by average policyholders’ surplus during the period. ISO compared statutory rates of return for mortgage and financial guaranty insurers with those of other insurers because ISO’s formula for calculating insurance industry GAAP rates of return may not be suitable for calculating GAAP rates of return for individual segments of the industry with distinct characteristics. Surplus for mortgage and financial guaranty insurers dropped to $11.9 billion at year-end 2008 from $14.0 billion at year-end 2007 and $15.7 billion at year-end 2006.

8. Changes in gross domestic product reflect both real growth in the economy and inflation.

9. ISO MarketWatch® tracks premiums on renewals for commercial auto liability, commercial auto physical damage, products liability, premises and operations liability, businessowners, commercial fire, and commercial allied lines, by class and statistical territory.

10. The PCS® data for direct insured property losses from catastrophes cited in this study is on an accident-year basis, excludes loss adjustment expenses, and is for all insurers, including residual market insurers, as well as foreign insurers and reinsurers. The data about direct catastrophe losses is based on information available through June 4, 2009, and is subject to change as more information about the cost of settling claims from past catastrophes becomes available.

11. Fast Track does not provide severity or frequency data for commercial lines.

12. For further information about the individual effects of abnormal catastrophe losses, E&A LLAE, and changes in reserve adequacy on combined ratios for the property/casualty insurance industry, see the analysis starting on page 24. When calculating adjusted combined ratios, ISO smoothed catastrophe losses, excluded E&A LLAE as defined for purposes of the Notes to Financial Statements included in the statutory Annual Statements insurers file with state regulators, and restated other losses to eliminate changes in reserve adequacy.

13. ISO obtained closing prices for the S&P 500 back to 1979 from IHS Global Insight and back to 1950 from the Financial Forecast Center, LLC.

14. Statutory Annual Statements provide only pretax values for write-downs on impaired investments.

15. Operating cash flow is the sum of underwriting cash flow, net investment income received, and other income received, minus taxes paid.

16. ISO’s OCF data extends back to 1979.

17. The exceptions were 1986 and 1987.

18. Standard & Poor’s COMPUSTAT® database includes information on several hundred industries. This analysis is based on data only for the industries for which sufficient information was available for all the years in each period studied. Including industries for which sufficient information was available for only some years might have distorted the results.