Insurer Financial Results: 2009

Executive Summary

The U.S. property/casualty insurance industry’s net income after taxes rose to $28.3 billion in 2009 from $3.0 billion the year before. The industry’s overall profitability as measured by its GAAP rate of return on average net worth (RONW) increased to 4.7% last year from 0.1% in 2008.[1]1. This study defines the U.S. property/casualty insurance industry as all private property/casualty insurers domiciled in the United States, including excess and surplus insurers and domestic insurers owned by foreign parents but excluding state funds for workers compensation and other residual market carriers. Throughout the study, the terms “insurers” and “industry” refer to property/casualty insurers and the property/casualty insurance industry, unless otherwise stated. The data in this report is based mainly on insurers’ statutory financial statements as supplied to ISO by April 2, 2010, and excludes foreign subsidiaries of U.S. insurance groups. All figures are net of reinsurance unless otherwise noted and may not balance because of rounding. But the industry’s recovery from the recession and financial crisis remained incomplete, with the industry’s $28.3 billion in net income for 2009 being less than half of its $62.5 billion in net income for 2007. Similarly, the industry’s 4.7% GAAP RONW for last year was less than half of its 10.9% GAAP RONW for 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 starting 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 — rose $54.2 billion, or 11.8%, to $511.5 billion at year-end 2009 from $457.3 billion at year-end 2008. Key leverage ratios, such as the premium-to-surplus ratio, suggest that insurers remained strongly capitalized. At year-end 2009, the ratio of premiums to surplus was a record-low 0.82, down from 0.95 at year-end 2008 and only about half the 1.55 average premium-to-surplus ratio from 1970 to 2009.[3]3. Unless otherwise specified, references to record lows and record highs for ratios and dollar values are based on data extending back to 1959. Record lows and record highs for growth rates are based on data extending back to 1960.

ISO’s analysis reveals that the increases in net income and overall profitability in 2009 were directly attributable to improvement in underwriting and investment results. Net losses on underwriting declined $18.1 billion to $3.1 billion in 2009 from $21.2 billion in 2008. Net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — rose $7.3 billion, or 23.2%, to $39.0 billion in 2009 from $31.7 billion the year before.

Despite the recovery in insurers’ results last year, they 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 2009, the median GAAP RONW for the Fortune 500 was 11.1% — 6.3 percentage points more than the GAAP RONW for the industry as a whole and 5.3 percentage points more than the GAAP RONW 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 a property/casualty insurer as “large” if the insurer accounts for more than 0.5% of the industry’s net written premium. In 2009, thirty-four large property/casualty insurers each wrote more than $2.1 billion in premiums.

Net Income and Return on Net Worth

The industry’s $28.3 billion in net income in 2009 consisted of $44.7 billion in operating income, less $8.0 billion in realized capital losses (after taxes) on investments and $8.4 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 property/casualty insurers’ statutory annual statements.

Table 1

Operating income — the sum of net gains (losses) on underwriting, net investment income, and miscellaneous other income — climbed $14.0 billion, or 45.8%, in 2009, primarily as a consequence of the $18.1 billion decline in net losses on underwriting. Net investment income fell $4.5 billion, or a record 8.7%, to $47.0 billion in 2009 from $51.5 billion in 2008. But miscellaneous other income rose $0.4 billion to $0.8 billion last year from $0.4 billion the year before.

At $8.0 billion in 2009, realized capital losses dropped $11.8 billion from $19.8 billion in 2008.

Partially offsetting the increase in operating income and the beneficial effect of the decline in realized capital losses, income taxes rose $0.6 billion to $8.4 billion in 2009 from $7.8 billion in 2008.

Though the recession and credit crisis continued taking a disproportionate toll on results for mortgage and financial guaranty (M&FG) insurers, their net income after taxes rose to $6.2 billion in 2009 from $17.8 billion in 2008. The increase in M&FG insurers’ net income was largely a result of special developments, including a $6.2 billion increase in salvage and subrogation. Results for M&FG insurers also benefited from special arrangements between one insurer and its financial counterparties that reduced loss and loss adjustment expenses by $3.6 billion.

Reflecting the increase in M&FG insurers’ net income after taxes, their statutory rate of return on average policyholders’ surplus rose to 51.4% last year from 133.5% the year before. Excluding M&FG insurers, the industry’s net income increased $13.7 billion to $34.5 billion in 2009 from $20.8 billion in 2008, causing its statutory rate of return on average policyholders’ surplus to rise to 7.3% in 2009 from 4.4% in 2008.[6]6. 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 $11.7 billion at year-end 2009 from $12.3 billion at year-end 2008 and $14.0 billion at year-end 2007.

Further analysis reveals a long-term downward trend in insurers’ overall profitability. Using averages to smooth the effects of cycles and random shocks, the insurance industry’s average GAAP RONW fell to 6.3% in the decade ending 2009 from 8.4% in the decade ending 1999 and 10.6% in the decade ending 1989.

Underwriting Results
Overall underwriting results improved in 2009 despite unprecedented declines in premiums. Net written premiums dropped a record 3.7% in 2009, after dropping 1.3% in 2008 and 0.6% in 2007. Net earned premiums fell a record 3.5% last year, after falling 0.1% in 2008. These declines in written premiums and earned premiums were the first since 1960, when ISO’s premium growth records begin.

Analysis of data for the past forty years reveals a long-term slowing in premium growth. From 1970 to 2009, net written premiums rose an average of 6.9% per year. But written premium growth slowed to an average of 3.5% per year during the twenty years ending 2009 from 10.4% per year during the twenty years ending 1989. 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 2009 was primarily a result of weakness in the economy and softening in commercial insurance markets. In particular, the real gross domestic product (GDP) of the United States — a broad measure of economic output — fell 2.4% in 2009. Consistent with the decline in real GDP, employment, wages and salaries, and retail sales also declined last year. Moreover, with weakness in the economy cutting into the demand for insurance, premiums on commercial renewals fell 0.6% in 2009 for all ISO MarketWatch® lines combined.[7]7. Using ISO’s statistical databases, ISO MarketWatch® tracks actual premiums for policies renewed with the same terms and conditions 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. Monthly data about the pricing of both new and renewal business from MarketScout’s Market Barometer indicates the price of commercial insurance fell an average of 6.0% in 2009, with prices falling 5.1% for small accounts, 6.3% for medium-sized accounts, 6.8% for large accounts, and 6.5% for jumbo accounts. In addition, prices declined for all fourteen coverage classes and all seven industry classes tracked by MarketScout.[8]8. For purposes of its Market Barometer, MarketScout defines small accounts as those generating up to $25,000 in premiums, medium-sized accounts as those generating from $25,001 to $250,000 in premiums, large accounts as those generating from $250,001 to $1,000,000 in premiums, and jumbo accounts as those generating more than $1,000,000 in premiums. The coverage classes for which MarketScout tracks changes in pricing are commercial property, business interruption, businessowners package polices, inland marine, general liability, umbrella/excess, commercial auto, workers compensation, professional liability, directors and officers liability, employment practices liability, fiduciary, crime, and surety. The industry classes for which MarketScout tracks changes in pricing are manufacturing, contracting, service, habitational, public entity, transportation, and energy. ISO averaged monthly values as reported by MarketScout to derive the annual values referenced in this report.

Unlike the ISO MarketWatch and MarketScout’s Market Barometer data for commercial lines, U.S. government Consumer Price Indexes (CPIs) indicate that consumers paid more for personal lines coverage in 2009 than they did the year before. In 2009, the CPI for motor vehicle insurance increased 4.5%, and the CPI for tenants’ and household insurance increased 2.2% percent.

Driving the decline in net losses on underwriting and the improvement in overall results last year, loss and loss adjustment expenses (LLAE) dropped $31.3 billion, or a record 9.3%, to $306.7 billion in 2009 from $338.0 billion in 2008. About a third of the decline in LLAE is attributable to a drop in U.S. catastrophe LLAE. ISO estimates that the net U.S. catastrophe LLAE included in private insurers’ financial results fell to $11.6 billion for 2009 from $22.6 billion for 2008, even though insurers’ net catastrophe LLAE for 2009 included some late-emerging losses from Hurricane Ike in 2008. Excluding catastrophe LLAE, net LLAE fell $20.2 billion, or 6.4 percent, to $295.1 billion for 2009 from $315.3 billion for 2008.

According to ISO’s Property Claim Services®(PCS®) unit, catastrophes striking the United States in 2009 caused $10.5 billion in direct insured losses (before reinsurance recoveries) — down $16.5 billion from $27.0 billion in 2008.[9]9. The PCS® data about direct catastrophe losses is based on information available through June 10, 2010, and is subject to change as more information about the cost of settling claims from past catastrophes becomes available. The data for direct insured losses from catastrophes 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. Direct catastrophe losses as cited in this study may differ from those published elsewhere because, for purposes of the analysis, ISO defined catastrophic events as those causing direct losses in excess of an inflation-adjusted dollar threshold equivalent to $25 million in 1997 and excluded events causing losses below the threshold.

Another third of the decrease in overall LLAE is attributable to a drop in the LLAE incurred by M&FG insurers, which fell $11.2 billion to $13.7 billion in 2009 from $24.8 billion in 2008. The decrease in M&FG insurers’ LLAE reflects many of the same special developments that affected their net income. Excluding M&FG insurers, industry LLAE fell $20.1 billion, or 6.4%, in 2009.

The remaining third of the $31.3 billion decline in overall LLAE in 2009 reflects a combination of factors, including changes in the adequacy of LLAE reserves. Excluding reserves for claims associated with past catastrophes and reserves for environmental and asbestos (E&A) claims, ISO estimates that reserve adequacy deteriorated by between $10.5 billion and $17.5 billion in 2009, after deteriorating by between $6.0 billion and $13.0 billion in 2008. Using the midpoints of those ranges, changes in the amount of deterioration in loss reserves account for $4.5 billion of the $20.2 billion decrease in noncatastrophe LLAE incurred in 2009. Other factors contributing to the decline in LLAE last year include a drop in insurers’ exposure to loss consequent to the weakness in the economy.

The decline in overall LLAE last year would have been greater if not for an increase in newly incurred E&A LLAE on policies written long ago. Incurred E&A LLAE rose to $2.5 billion in 2009 from $1.4 billion in 2008.

While the decline in overall LLAE accounts for the bulk of the improvement in underwriting results last year, other underwriting expenses — primarily acquisition expenses; other expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — fell $2.3 billion, or 1.9%, 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% decline in net written premiums rather than increases in efficiency.

Dividends to policyholders in 2009 amounted to $2.0 billion, essentially unchanged from the amount in 2008.

Echoing the improvement in underwriting results last year, the combined ratio — a key measure of losses and expenses per dollar of premium — fell to 101.0% in 2009 from 105.0% in 2008. Though the 101.0% combined ratio for 2009 was 4.0 percentage points lower than the average combined ratio for the forty years from 1970 to 2009, 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 4.7% GAAP RONW for 2009 was 10.3 percentage points less than its 15.0% GAAP RONW for 1986, even though the 101.0% combined ratio for 2009 was 7.1 percentage points better than the 108.1% combined ratio for 1986.

M&FG insurers’ combined ratio improved to 192.0% in 2009 from 297.6% in 2008, as a consequence of special developments that drove a 45.0% decline in their loss and loss adjustment expenses. Excluding M&FG insurers, the industry’s combined ratio receded to 99.3% last year from 101.0% in 2008.

Additional ISO analyses indicate that abnormal catastrophe losses, E&A losses, and changes in the adequacy of reserves for other losses also affected the industry’s combined ratio for 2009. If not for abnormal catastrophe losses, E&A LLAE, changes in the adequacy of reserves for other LLAE, and the disproportionately large decrease in M&FG insurers’ combined ratio last year, the industry’s combined ratio would have risen 2.5 percentage points in 2009 to 101.3% from 98.9% in 2008, instead of dropping 4.1 percentage points to 101.0% from 105.0%.[10]10. For further information about the individual effects of abnormal catastrophe losses, E&A LLAE, changes in reserve adequacy, and M&FG insurers’ results on combined ratios for the industry, see the analysis starting on page 25. 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, restated other losses to eliminate changes in reserve adequacy, and excluded results for M&FG insurers.

Adjusted for abnormal catastrophe losses, E&A LLAE, changes in reserve adequacy, and M&FG insurers’ results, the combined ratio averaged 100.5% from 1999 to 2009 — 2.6 percentage points less than the 103.1% average combined ratio based on reported results. That is, the combined net effect of abnormal catastrophe losses, E&A LLAE, changes in reserve adequacy, and M&FG insurers’ results from 1999 to 2009 was to raise the combined ratio by an average of 2.6 percentage points. But the net effect of these factors has varied by year. For example, the net effect in 2000 was to reduce the industry’s combined ratio by 10.6 percentage points, but the net effect in 2005 was to raise it by 13.6 percentage points.

Investment Income
Net investment income fell $4.5 billion to $47.0 billion in 2009 from $51.5 billion in 2008. Fundamentally, insurers’ investment income is determined by the amount of insurers’ cash and invested assets and by the yield on those assets. In 2009, investment income dropped a record 8.7%, as insurers’ average holdings of cash and invested assets fell 1.0% and the investment income yield on insurers’ average holdings of cash and invested assets declined to 3.9% from 4.2%. In turn, the decline in the yield on cash and invested assets reflects trends in interest rates, with the yield on ten-year Treasury notes receding to an average of 3.3% in 2009 from 3.7% the year before.

Further analysis reveals a long-term slowing in the growth of investment income, with the average annual rate of growth in investment income declining to 2.1% during the twenty years ending 2009 from 15.7% during the twenty years ending 1989.

The long-term slowing in the growth of investment income reflects trends in insurers’ holdings of cash and invested assets. From 1990 to 2009, insurers’ average holdings of cash and invested assets rose an average of 5.4% per year — down from 11.8% 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 5.6% during the twenty years ending 2009 — down from 9.0% during the twenty years ending 1989. The investment income yield on insurers’ cash and invested assets averaged 5.2% during the twenty years ending 2009 — down from 6.3% during the twenty years ending 1989.

Capital Gains
Combining insurers’ $8.0 billion in realized capital losses after taxes in 2009 with their $23.1 billion in unrealized capital gains after taxes, insurers posted $15.1 billion in overall capital gains after taxes last year — an $87.8 billion swing from the $72.7 billion in capital losses after taxes in 2008. The swing to overall capital gains stems from developments in financial markets and a reduction in write-downs on investments that became impaired as a result of the recession and the crisis in the financial system. The S&P 500 index of common stock prices rose 23.5% in 2009, after declining a record 38.5% in 2008.[11]11. 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’ pretax write-downs on impaired investments fell to $14.7 billion in 2009 from $24.9 billion in 2008.[12]12. Statutory annual statements provide only pretax values for write-downs on impaired investments.

In 2009, insurers’ pretax capital gains on common stocks amounted to an estimated 16.2% of the value of common stocks held by insurers at the start of the year — 7.2 percentage points less than the increase 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-three of the thirty years from 1980 to 2009, and insurers posted capital gains on common stocks during each of those years. Conversely, the S&P 500 declined in seven of the thirty years ending 2009, 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 2009, increases in the S&P 500 averaged 8.1% per year, and insurers’ pretax capital gains on common stocks averaged 7.5% of the value of their holdings at the start of each year.

Policyholders’ Surplus and Leverage
Policyholders’ surplus rose $54.2 billion, or 11.8%, to $511.5 billion at year-end 2009 from $457.3 billion at year-end 2008. While insurers have regained much of the surplus lost as a result of the recession and the crisis in credit markets, surplus at year-end 2009 was down 1.2% compared with surplus at year-end 2007.

Additions to surplus in 2009 included $28.3 billion in net income after taxes, $23.1 billion in unrealized capital gains on investments (net of changes in deferred taxes associated with such gains), $6.5 billion in new funds paid in, and a record $13.0 billion in miscellaneous other surplus changes. Those additions were partially offset by $16.7 billion in dividends to stockholders.

Table 2

The $23.1 billion in unrealized capital gains in 2009 contrasts with $52.9 billion in unrealized capital losses in 2008.

At $6.5 billion in 2009, new funds paid in decreased $5.8 billion from $12.3 billion in 2008.

The $13.0 billion in miscellaneous additions to surplus in 2009 compares with $1.1 billion in such additions in 2008. The $13.0 billion for 2009 includes $4.6 billion for M&FG insurers, of which $4.1 billion is attributable to releases from contingency reserves built up during profitable years. Excluding M&FG 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.

At $16.7 billion in 2009, dividends to stockholders decreased $7.4 billion, or 30.5%, from $24.1 billion in 2008.

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 declined to a record-low 0.82 last year from 0.95 in 2008. The LLAE-reserves-to-surplus ratio also fell in 2009, decreasing to 1.08 from 1.21 in 2008.

Both the premium-to-surplus and LLAE-reserves-to-surplus 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 1.78 in the decade ending 1989 to 1.18 in the decade ending 1999 and 1.01 in the decade ending 2009. 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 1.97 in the ten years ending 1989 to 1.60 in the ten years ending 1999 and 1.18 in the ten years ending 2009.

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 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 2.60 in the decade ending 2009 from 2.92 in the decade ending 1999 and 3.34 in the decade ending 1989. 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.[13]13. Operating cash flow is the sum of underwriting cash flow, net investment income received, and other income received, minus taxes paid.

Despite the improvement in underwriting results and the increase in insurers’ net income last year, OCF dropped to an estimated $35.6 billion in 2009 from $38.7 billion in 2008 and $69.4 billion in 2007. At $35.6 billion last year, OCF was less than half of the record-high $89.9 billion for 2004.[14]14. ISO’s OCF data extends back to 1979.

The $3.1 billion decrease in OCF last year reflects a $6.1 billion decrease in net underwriting cash flow to an estimated $8.0 billion in 2009 from $1.9 billion in 2008. Also contributing to the decrease in OCF, net investment income received fell $5.3 billion to $49.1 billion in 2009 from $54.3 billion the year before, as other income received fell to $0.8 billion from $1.0 billion.

Partially offsetting these developments, income taxes paid (a cash outflow) dropped to an estimated $6.3 billion last year from $14.7 billion in 2008.

The decline in underwriting cash flow in 2009 is primarily attributable to a decline in premiums received consequent to the declines in net written premiums in 2009 and 2008, whereas the decline in net investment income received reflects the declines in net investment income earned during the past two years.

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 8.5% in 2009 from 8.9% in 2008 and 15.7% in 2007.

From 1980 to 2009, the industry’s OCF ratio averaged 13.1%. 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-seven years from the start of ISO’s data for the Fortune 500 in 1983 to 2009, the rate of return for the Fortune 500 exceeded the rates of return for both the property/casualty industry overall and large property/casualty insurers.[15]15. The exceptions were 1986 and 1987. From 1983 to 2009, the median GAAP RONW for the Fortune 500 averaged 13.9% — 5.8 percentage points more than the 8.1% average GAAP RONW for the entire property/casualty industry and 5.3 percentage points more than the 8.6% average GAAP RONW for large property/casualty insurers.

Despite the recovery in property/casualty insurers’ results in 2009 and a decline in the rate of return for the Fortune 500, the shortfall in property/casualty insurers’ profitability last year remained relatively large compared with historical averages. In 2009, the GAAP RONW for the entire property/casualty industry was 6.3 percentage points less than the GAAP RONW for the Fortune 500. But large property/casualty insurers faired no worse than average, with their GAAP RONW for 2009 being 5.3 percentage points less than that for the Fortune 500.

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.[16]16. 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 1999 to 2008 (the latest year for which complete COMPUSTAT data was available), the GAAP RONW for the property/casualty industry averaged 6.4% — 3.1 percentage points less than the 9.6% average GAAP RONW for 302 other industries. In a ranking from most to least profitable during that ten-year period, the property/casualty industry ranked 206 out of 303 industries. The results were similar when ISO lengthened the analysis to include the ten years from 1989 to 1998.

Other Analyses
Additional analyses in this study report on:

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

1. This study defines the U.S. property/casualty insurance industry as all private property/casualty insurers domiciled in the United States, including excess and surplus insurers and domestic insurers owned by foreign parents but excluding state funds for workers compensation and other residual market carriers. Throughout the study, the terms “insurers” and “industry” refer to property/casualty insurers and the property/casualty insurance industry, unless otherwise stated. The data in this report is based mainly on insurers’ statutory financial statements as supplied to ISO by April 2, 2010, and excludes foreign subsidiaries of U.S. insurance groups. All figures are net of reinsurance unless otherwise noted and 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 starting on page 88 for a discussion of the major differences between GAAP and SAP.

3. Unless otherwise specified, references to record lows and record highs for ratios and dollar values are based on data extending back to 1959. Record lows and record highs for growth rates are based on data extending back to 1960.

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 a property/casualty insurer as “large” if the insurer accounts for more than 0.5% of the industry’s net written premium. In 2009, thirty-four large property/casualty insurers each wrote more than $2.1 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 property/casualty insurers’ statutory annual statements.

6. 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 $11.7 billion at year-end 2009 from $12.3 billion at year-end 2008 and $14.0 billion at year-end 2007.

7. Using ISO’s statistical databases, ISO MarketWatch® tracks actual premiums for policies renewed with the same terms and conditions 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.

8. For purposes of its Market Barometer, MarketScout defines small accounts as those generating up to $25,000 in premiums, medium-sized accounts as those generating from $25,001 to $250,000 in premiums, large accounts as those generating from $250,001 to $1,000,000 in premiums, and jumbo accounts as those generating more than $1,000,000 in premiums. The coverage classes for which MarketScout tracks changes in pricing are commercial property, business interruption, businessowners package polices, inland marine, general liability, umbrella/excess, commercial auto, workers compensation, professional liability, directors and officers liability, employment practices liability, fiduciary, crime, and surety. The industry classes for which MarketScout tracks changes in pricing are manufacturing, contracting, service, habitational, public entity, transportation, and energy. ISO averaged monthly values as reported by MarketScout to derive the annual values referenced in this report.

9. The PCS® data about direct catastrophe losses is based on information available through June 10, 2010, and is subject to change as more information about the cost of settling claims from past catastrophes becomes available. The data for direct insured losses from catastrophes 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. Direct catastrophe losses as cited in this study may differ from those published elsewhere because, for purposes of the analysis, ISO defined catastrophic events as those causing direct losses in excess of an inflation-adjusted dollar threshold equivalent to $25 million in 1997 and excluded events causing losses below the threshold.

10. For further information about the individual effects of abnormal catastrophe losses, E&A LLAE, changes in reserve adequacy, and M&FG insurers’ results on combined ratios for the industry, see the analysis starting on page 25. 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, restated other losses to eliminate changes in reserve adequacy, and excluded results for M&FG insurers.

11. 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.

12. Statutory annual statements provide only pretax values for write-downs on impaired investments.

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

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

15. The exceptions were 1986 and 1987.

16. 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.