P/C Industry Net Income Falls Nearly 60% in First-Half 2009

Private U.S. property/casualty insurers' net income after taxes fell 59.3 percent to $5.8 billion in first-half 2009 from $14.1 billion in first-half 2008. Insurers' overall profitability as measured by their annualized rate of return on average policyholders' surplus (or statutory net worth) dropped to 2.5 percent in first-half 2009 from 5.5 percent in first-half 2008.

Driving the declines in insurers' net income and rate of return, their net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell 50.2 percent to $12.4 billion in first-half 2009 from $24.9 billion in first-half 2008, according to ISO and the Property Casualty Insurers Association of America (PCI).

Partially offsetting the deterioration in insurers' investment results, net losses on underwriting fell $3.4 billion to $2.2 billion in first-half 2009 from $5.6 billion in first-half 2008. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 100.9 percent in the first half of this year from 102 percent in the first half of 2008.

Policyholders' surplus — insurers' net worth measured according to Statutory Accounting Principles — rose 1.2 percent to $463 billion at June 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.

"Insurers' 2.5 percent annualized rate of return for the first half of 2009 is their second-lowest first-half rate of return since the start of ISO's quarterly data in 1986 and 7 percentage points less than the 9.5 percent average first-half rate of return for the past 24 years," said Michael R. Murray, ISO's assistant vice president for financial analysis.

Results for mortgage and financial guaranty insurers were particularly poor, with ISO estimating that mortgage and financial guaranty insurers' annualized rate of return fell to negative 76.5 percent in first-half 2009 from negative 67.4 percent in first-half 2008, Murray said. "Excluding mortgage and financial guaranty insurers, the insurance industry's annualized rate of return declined to 4.5 percent in first-half 2009 from 7.7 percent in first-half 2008."

"While insurers' profits and profitability tumbled in first-half 2009, the insurance industry remained profitable and policyholders' surplus increased. Property/casualty insurers continue to be healthy and competitive despite an extraordinarily difficult operating environment complicated by the worst recession in decades and the lingering effects of an unprecedented financial crisis that brought down many once iconic banks and Wall Street institutions," said David Sampson, PCI president and chief executive officer. "Moreover, combining insurers' $463 billion in policyholders' surplus at June 30 with their $553.4 billion in loss and loss adjustment expense reserves and their $202.5 billion in unearned premium reserves, insurers had just over $1.2 trillion in funds available to cover losses and other contingencies. This stability is important to the industry's ability to fulfill its promise to consumers."

Underwriting Results

Underwriting results improved in first-half 2009 even though premiums continued declining. Net written premiums dropped $9.4 billion, or 4.2 percent, to $212.8 billion in first-half 2009 from $222.2 billion in first-half 2008. Net earned premiums declined $6.3 billion, or 2.9 percent, to $211.4 billion in first-half 2009 from $217.8 billion in first-half 2008.

At negative 4.2 percent in first-half 2009, net written premium growth was the weakest for any first half since the start of ISO's quarterly financial data for the property/casualty industry. The previous record lows for first-half premium growth were negative 0.5 percent in 2008 and positive 0.1 percent in 2007, with first-half premium growth ranging as high as 13 percent in 1987.

"The decline in written premiums reflects economic conditions. The nation's gross domestic product [GDP], which takes into account both inflation and real growth, fell 1.9 percent in first-half 2009 compared with its level a year earlier. Moreover, total private-sector employment fell 4.3 percent, private-sector wages and salaries fell 5.6 percent, and sales by retailers, including restaurants and other food services, dropped 9.4 percent, with all of this reducing the demand for insurance," said Murray.

Driving the improvement in underwriting results in first-half 2009, insurers' overall net loss and loss adjustment expenses (after reinsurance recoveries) fell $8 billion, or 4.9 percent, to $154.1 billion in the first half of 2009 from $162.1 billion in the first half of 2008. ISO estimates that the net catastrophe losses included in private insurers' financial results declined to $8.1 billon in first-half 2009 from $10.7 billion in first-half 2008, even though first-half 2009 net catastrophe losses include some late-emerging losses from Hurricane Ike in 2008. Excluding catastrophe losses, net loss and loss adjustment expenses fell $5.5 billion, or 3.6 percent, to $145.9 billion in first-half 2009 from $151.4 billion in first-half 2008.

According to ISO's Property Claim Services (PCS) unit, catastrophes striking the United States in the first half of 2009 caused $7.5 billion in direct insured losses to property (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers) — down $3.1 billion from the direct insured losses to property due to the catastrophes striking the United States in the first half of 2008 but $2 billion more than the $5.5 billion average for first-half direct catastrophe losses during the past 10 years.

Also contributing to the improvement in underwriting results in first-half 2009, other underwriting expenses — primarily acquisition expenses, expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — dropped $1.7 billion, or 2.8 percent, to $58.9 billion in first-half 2009 from $60.6 billion in first-half 2008.

Dividends to policyholders were essentially unchanged at $0.7 billion in both the first half of 2009 and the first half of 2008.

The $2.2 billion net loss on underwriting in first-half 2009 amounts to 1 percent of the $211.4 billion in net premiums earned during the period, whereas the $5.6 billion net loss on underwriting in first-half 2008 amounted to 2.6 percent of the $217.8 billion in net premiums earned during that period.

"While the 100.9 percent combined ratio for first-half 2009 compares favorably with the 103.8 percent average combined ratio for all first halves 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, in first-half 1987, insurers achieved a 15 percent annualized overall rate of return with a combined ratio of 104.1 percent. In first-half 2009, insurers' annualized rate of return was just 2.5 percent, even though the combined ratio was 3.3 percentage points better."

Second-Quarter Results

The industry's consolidated net income after taxes for second-quarter 2009 amounted to $7.1 billion, up 28.1 percent from the $5.5 billion in net income for second-quarter 2008. Reflecting the increase in net income, property/casualty insurers' annualized rate of return on average surplus rose to 6.3 percent in second-quarter 2009 from 4.3 percent a year earlier.

Mortgage and financial guaranty insurers' annualized rate of return rose to negative 22.1 percent in second-quarter 2009 from negative 45.6 percent in second-quarter 2008, as their net income after taxes increased to negative $0.6 billion from negative $1.7 billion.

Excluding mortgage and financial guaranty insurers, the insurance industry's annualized rate of return rose to 7 percent in second-quarter 2009 from 5.8 percent a year earlier, as its net income rose 6.9 percent.

Second-quarter 2009 net income for the entire insurance industry consisted of $12.7 billion in pretax operating income, less $3.2 billion in realized capital losses on investments and $2.5 billion in federal and foreign income taxes.

The industry's second-quarter pretax operating income of $12.7 billion is up 59.5 percent from $8 billion in second-quarter 2008. Second-quarter 2009 operating income consisted of $0.4 billion in net gains on underwriting, $11.9 billion in net investment income, and $0.5 billion in miscellaneous other income. Excluding mortgage and financial guaranty insurers, operating income rose 9.4 percent to $11 billion in second-quarter 2009 from $10.1 billion in second-quarter 2008.

The $0.4 billion in net gains on underwriting in second-quarter 2009 constitutes a $5.4 billion positive swing from the $5.1 billion in net losses on underwriting in second-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 $4.8 billion in second-quarter 2009 from $7.1 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 second-quarter 2009 totaled $4.3 billion, down $2.8 billion from the direct insured losses caused by catastrophes that struck in second-quarter 2008, according to ISO's PCS unit.

Second-quarter 2009 net gains on underwriting amount to 0.4 percent of the $105.8 billion in premiums earned during the period, in contrast to second-quarter 2008 net losses on underwriting amounting to 4.6 percent of the $109.8 billion in premiums earned during the period.

The industry's combined ratio improved to 99.5 percent in second-quarter 2009 from 104.1 percent in second-quarter 2008. At 99.5 percent, the industry's quarterly combined ratio had improved to its best level since the 95.9 percent combined ratio for third-quarter 2007.

The $0.4 billion in net gains 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 second-quarter 2008.

Written premiums fell $5.4 billion, or 4.8 percent, to $106.3 billion in second-quarter 2009 from $111.7 billion in second-quarter 2008. At negative 4.8 percent in second-quarter 2009, quarterly written premium growth had fallen to a record low not seen since third-quarter 2005.

Excluding mortgage and financial guaranty insurers, net written premiums fell 4.4 percent in second-quarter 2009, loss and loss adjustment expenses dropped 5.8 percent, and the combined ratio improved to 100.5 percent from 101.6 percent in second-quarter 2008.

"Written premiums have now declined versus year-ago levels for nine successive quarters," said Sampson. "Prior to second-quarter 2007, 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, but the declines since second-quarter 2007 were a result of increasingly intense competition in many insurance markets and the recession that began in December 2007."

The $11.9 billion in net investment income in second-quarter 2009 is down $1.2 billion, or 9.2 percent, compared with investment income in second-quarter 2008.

Miscellaneous other income rose to $0.5 billion in second-quarter 2009 from near zero in second-quarter 2008.

The $3.2 billion in realized capital losses on investments in the second quarter of 2009 contrasts with the $0.7 billion in realized capital losses in the second quarter of 2008.

Combining net investment income and realized capital losses, the industry posted $8.7 billion in net investment gains in second-quarter 2009, down 30.1 percent from $12.4 billion a year earlier.

Unrealized capital gains on investments in second-quarter 2009 totaled $15.9 billion, whereas insurers posted $8.3 billion in unrealized capital losses on investments in second-quarter 2008. Combining realized losses and unrealized capital gains, the insurance industry posted $12.7 billion in overall capital gains in second-quarter 2009 — a $21.6 billion positive swing from the $8.9 billion in overall capital losses in second-quarter 2008.

The $12.7 billion in overall capital gains for second-quarter 2009 includes $5 billion in realized write-downs on impaired securities, with realized write-downs on impaired securities having risen from $2.6 billion in second-quarter 2008.