P/C Industry’s Net Income Up; Combined Ratio at 100.7 for Q3

December 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.

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.

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 Michael R. Murray, ISO’s assistant vice president for financial analysis. “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 10 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 David Sampson, PCI president and chief executive officer. “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.”

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.

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 10 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.”

Source: PCI, ISO

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