Underwriting Hurt Insurers’ Bottom Lines in 2007

April 21, 2008

Steep declines in underwriting profits hurt bottom lines for property casualty insurers, which saw their 2007 profits slip slightly from a year earlier, a new report from three industry groups says.

The industry’s net income after taxes fell 5.8 percent to $61.9 billion last year, down from $65.8 billion in 2006, according to an analysis by Insurance Services Organization, the Insurance Information Institute and the Property Casualty Insurers Association of America.

The insurance industry’s overall profitability — measured by average rates of return on policyholders’ surplus — fell to 12.3 percent in 2007, down from 14.4 percent in 2006. These figures are consolidated estimates for all private U.S. property/casualty insurers based on reports accounting for at least 96 percent of all business written by those insurers.

Shrinking underwriting profits were a major driver behind the drop in profits, said Michael Murray, ISO’s assistant vice president of financial analysis. Net gains on underwriting fell 38.9 percent to $19 billion in 2007, down from $31.1 billion in 2006. Those losses were partially offset by investment gains and realized capital gains.

Despite the deterioration in underwriting results, the industry posted a 95.6 percent combined ratio for 2007 — the second best for any year since ISO began record keeping in 1959.

Even so, underwriting results weren’t good enough for insurers to achieve the rate of return typically earned by firms in other industries, said Murray. Fortune 500 firms, for instance, have a 13.9 percent long-term average rate of return, he said.

David Sampson, PCI president and CEO, said the combination of low interest rates and investment yields, force insurers to post better underwriting results just to remain as profitable as they once were.

Another worrisome trend: A 0.6 percent decline in written premiums in 2007 — the first drop on record — which Sampson said suggests intense competition is cutting into premiums. That decline contrasted with growth in underwriting expenses, primarily acquisition expenses, expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes. Those expenses grew 1.6 percent to $119 billion, up from $117.1 billion in 2006.

Despite the weakened profits, results were still exceptionally strong, said ISO’s Murray, and benefitted from “good luck” in the form of near-absent hurricanes.

“Though we’d all like our run of good luck to continue, there’s no escaping the fact that millions of people live in areas exposed to hurricanes and earthquakes and that, consequently, there are trillions of dollars of property in areas subject to natural catastrophes,” he said.

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