A decline in investment gains seems to be the driver of private U.S. P&C insurers’ poor first-half net income numbers. Net income after taxes fell 59.3% to $5.8 billion in first-half 2009 from $14.1 billion in first-half 2008. P&C insurers’ net investment gains—the sum of net investment income and realized capital gains (or losses) on investments—fell 50.2% 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).

Insurers’ overall profitability, as measured by their annualized rate of return on average policyholders’ surplus (or statutory net worth), dropped to 2.5% in first-half 2009 from 5.5% in first-half 2008.

“Insurers’ 2.5% 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% points less than the 9.5% average first-half rate of return for the past 24 years,” says Michael Murray, ISO’s assistant VP 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% in first-half 2009 from negative 67.4% in first-half 2008. Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return declined to 4.5% in first-half 2009 from 7.7% in first-half 2008.”

Partially offsetting the deterioration in insurers’ investment results, underwriting results improved in first-half 2009 even though premiums continued declining. Net written premiums dropped $9.4 billion, or 4.2%, 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%, to $211.4 billion in first-half 2009 from $217.8 billion in first-half 2008.

Also, policyholders’ surplus—insurers’ net worth measured according to Statutory Accounting Principles—rose 1.2% to $463 billion at June 30, 2009, from $457.3 billion at year-end 2008.

“While insurers’ profits and profitability tumbled in first-half 2009, the insurance industry remained profitable and policyholders’ surplus increased,” says David Sampson, PCI president and CEO. “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. 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.”  

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

Second-quarter 2009 net income for the 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% 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% 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.

 

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