P/C Industry’s Net Income Up $25B in 2009; Combined Ratio Improves

April 15, 2010

The U.S. property/casualty industry’s profitability as measured by their rate of return on average policyholders’ surplus (or statutory net worth) increased by 5.8 percent in 2009, while private P/C insurers’ net income after taxes rose to $28.3 billion in 2009 from $3 billion the year before. Overall profitability measured at just 0.6 percent in 2008.

However, the recession and financial crisis continues to hamper the industry’s overall results, insurers say, stating the $28.3 billion in net income for 2009 is less than half of their $62.5 billion in net income for 2007. Similarly, insurers’ 5.8 percent overall rate of return for last year was less than half of their 12.4 percent rate of return for 2007.

Net losses on underwriting fell by $18.1 billion to $3.1 billion in 2009 from $21.2 billion in 2008, and claim costs (loss and loss adjustment expenses) dropped $31.3 billion, according to ISO and the Property Casualty Insurers Association of America (PCI).

Driven by the decline in claim costs, the combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 101 percent in 2009 from 105 percent in 2008.

Also contributing to profits and profitability, P/C insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — rose 23.2 percent to $39 billion in 2009 from $31.7 billion in 2008.

Policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — rose 11.8 percent to $511.5 billion at year-end 2009 from $457.3 billion at year-end 2008. Nonetheless, surplus at year-end 2009 was down 1.2 percent compared with surplus at year-end 2007.

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.

“Though insurers’ 5.8 percent rate of return for 2009 was nearly 10 times their 0.6 percent rate of return for 2008, insurers’ overall rate of return remained below its long-term average,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “During the 51 years from the start of ISO’s annual data for the insurance industry to 2009, insurers’ rate of return averaged 9.1 percent. The industry’s subpar performance last year reflects a combination of negative rates of return for mortgage and financial guaranty insurers and modest single-digit rates of return for other insurers.”

ISO estimates that mortgage and financial guaranty insurers’ rate of return on average surplus last year was negative 51.4 percent, up from negative 133.4 percent in 2008. Other property/casualty insurers’ rate of return for 2009 was 7.3 percent, up from 4.4 percent a year earlier.

“The increases in property/casualty insurers’ income, rate of return, and policyholders’ surplus leave them well positioned to fulfill their obligations to policyholders and provide the insurance coverage necessary to fuel the economic recovery,” said David Sampson, PCI president and CEO. “Combining insurers’ $511.5 billion in policyholders’ surplus at year-end 2009 with their $552.9 billion in loss and loss adjustment expense reserves and $197.5 billion in unearned premium reserves, insurers had almost $1.3 trillion in funds available to fulfill their promises to policyholders and finance new coverage.”

Underwriting Results

Overall underwriting results improved in 2009 even though premiums continued declining.

Net written premiums dropped $16 billion, or 3.7 percent, to $419 billion for 2009 from $434.9 billion for 2008. Net earned premiums declined $15.4 billion, or 3.5 percent, to $422.9 billion for 2009 from $438.3 billion for 2008.

Net written premium growth has been negative for three consecutive years, with net written premium growth falling to a new record low in 2009. Data extending back to 1959 indicates that the previous record lows were negative 1.3 percent in 2008 and negative 0.6 percent in 2007 and that, prior to recent declines, net written premiums rose every year through 2006.

“The 3.7 percent decline in net written premiums last year reflects the lingering aftereffects of the recession and crisis in the financial system. The latest data shows the nation’s real gross domestic product [GDP] fell 2.4 percent in 2009, with total private-sector employment falling 5.2 percent and private-sector wages and salaries dropping 5.4 percent. Moreover, sales by retailers, including restaurants and other food services, dropped 6.3 percent,” said Murray.

These declines all reduce demand for insurance. “And with insurers battling one another for shares of a smaller economic pie, market surveys indicate the recession contributed to softening in commercial insurance markets,” Murray said.

But insurers’ loss and loss adjustment expenses (LLAE) fell faster than premiums in 2009, leading to improvement in overall underwriting results. Overall net LLAE (after reinsurance recoveries) fell a record 9.3 percent to $306.7 billion last year from $338 billion in 2008.

About a third of the decline in net LLAE is attributable to a drop in U.S. catastrophe losses. ISO estimates that the net U.S. catastrophe losses included in private insurers’ financial results fell to $11.2 billion for 2009 from $21.8 billion for 2008, even though insurers’ net catastrophe losses for 2009 include some late-emerging losses from Hurricane Ike in 2008.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in 2009 caused $10.6 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers) — down $16.5 billion from the direct insured losses due to catastrophes that struck the United States in 2008 and $8.8 billion less than the $19.3 billion average for direct catastrophe losses during the past 10 years.

Excluding catastrophe losses, net LLAE fell $20.7 billion, or 6.5 percent, to $295.5 billion for 2009 from $316.2 billion for 2008.

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 $2.3 billion, or 1.9 percent, 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 percent decline in net written premiums rather than increases in efficiency.

Dividends to policyholders in 2009 amounted to $2 billion, essentially unchanged from dividends to policyholders in 2008.

The $3.1 billion net loss on underwriting for 2009 amounted to 0.7 percent of the $422.9 billion in net premiums earned during the year, whereas the $21.2 billion net loss on underwriting for 2008 amounted to 4.8 percent of the $438.3 billion in net premiums earned during that year.

“While the 101 percent combined ratio for 2009 compares favorably with the 104 percent average combined ratio for the 50 years from 1959 to 2008, 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 1986, insurers achieved a 15.1 percent overall rate of return with a combined ratio of 108.1 percent. For 2009, insurers’ annualized rate of return was just 5.8 percent, even though the combined ratio was seven percentage points better.”

Mortgage and financial guaranty insurers continued to suffer disproportionate losses on underwriting consequent to the recession, foreclosures, and defaults on securities, Murray added. “But their underwriting results improved significantly, largely as a result of special arrangements between one insurer and its financial counterparties.”

Mortgage and financial guaranty insurers’ net written premiums declined 24.9 percent to $6.6 billion for 2009, Murray said. “But their loss and loss adjustment expenses fell 45 percent to $13.7 billion, and their combined ratio improved to 192 percent for 2009 from 297.6 percent for 2008.”

Excluding mortgage and financial guaranty insurers, industry net written premiums fell 3.2 percent, loss and loss adjustment expenses dropped 6.4 percent, and the combined ratio receded to 99.3 percent for 2009 from 101 percent for 2008, Murray said.

Fourth-Quarter Results

The industry’s consolidated net income after taxes for fourth-quarter 2009 amounted to $12.1 billion — a $13.5 billion swing from the industry’s $1.3 billion net loss after taxes for fourth-quarter 2008. Insurers’ annualized rate of return on average surplus rose to 9.7 percent in fourth-quarter 2009 from negative 1.1 percent a year earlier.

Mortgage and financial guaranty insurers’ annualized rate of return increased to negative 66.2 percent in fourth-quarter 2009 from negative 221 percent in fourth-quarter 2008, as their net income after taxes rose to negative $1.9 billion from negative $6.6 billion.

Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return rose to 11.4 percent in fourth-quarter 2009 from 4.7 percent in fourth-quarter 2008, as its net income increased to $14 billion from $5.3 billion.

Fourth-quarter 2009 net income for the entire insurance industry consisted of $11 billion in pretax operating income and $1.7 billion in realized capital gains on investments, less $0.5 billion in federal and foreign income taxes.

The industry’s combined ratio improved to 101.9 percent in fourth-quarter 2009 from 103.7 percent in fourth-quarter 2008.

Written premiums fell $0.8 billion, or 0.8 percent, to $97.8 billion in fourth-quarter 2009 from $98.6 billion in fourth-quarter 2008. Fourth-quarter 2009 marked the 11th consecutive quarter of declining net written premiums for the P/C industry. Prior to this string of declines, analysis of quarterly data extending back to 1986 indicates net written premiums declined in just two other quarters, with net written premiums falling 4.8 percent in third-quarter 2005 and 0.1 percent in fourth-quarter 1991. The decline in third-quarter 2005 reflects a special transaction in which one insurer ceded $6 billion in premiums and the same amount of loss and loss adjustment expenses to its foreign parent.

Excluding mortgage and financial guaranty insurers, net written premiums fell 0.5 percent in fourth-quarter 2009, loss and loss adjustment expenses dropped 2.1 percent, and the combined ratio rose to 99.2 percent from 98.5 percent in fourth-quarter 2008.

The industry’s fourth-quarter pretax operating income of $11 billion was down $0.5 billion from $11.5 billion in fourth-quarter 2008. Fourth-quarter 2009 operating income consisted of $0.2 billion in net gains on underwriting, $11.1 billion in net investment income, and negative $0.3 billion in miscellaneous other income. Excluding mortgage and financial guaranty insurers, operating income fell 21.7 percent to $13.2 billion in fourth-quarter 2009 from $16.9 billion in fourth-quarter 2008.

The $0.2 billion in net gains on underwriting in fourth-quarter 2009 contrasts with $1.3 billion in net losses on underwriting in fourth-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 $0.2 billion in fourth-quarter 2009 from $0.6 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 fourth-quarter 2009 totaled $0.2 billion, down $0.1 billion from the $0.3 billion in direct insured losses caused by catastrophes that struck in fourth-quarter 2008, according to ISO’s PCS unit.

Fourth-quarter 2009 net gains on underwriting amounted to 0.2 percent of the $105.1 billion in premiums earned during the period, compared with fourth-quarter 2008 net losses on underwriting amounting to 1.2 percent of the $107.8 billion in premiums earned during that period.

The $0.2 billion in net gains on underwriting was after deducting $1 billion in premiums returned to policyholders as dividends, with dividends to policyholders essentially unchanged from their level in fourth-quarter 2008.

The $11.1 billion in net investment income in fourth-quarter 2009 was down 15.8 percent compared with investment income in fourth-quarter 2008.

Sources: PCI, ISO

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