P&C Insurers Unscathed After Tumultuous 2009

Given the lingering effects of financial crisis, it may come as no surprise to industry observers that it's been a struggle for insurance companies to scratch their way back to the positive side of the ledger. Reports abounded last week regarding the state of the property/casualty industry: that it faced a slow road to premium recovery, was exposed to underwriting issues thanks to D&O and E&O woes and its capital position was strong despite municipal credit demands, but that was then, and this is now. Today, a new study from Standard & Poor's Ratings Services surfaced, painting a slightly rosier picture; P&C insurers have maintained financial strength despite poor economic conditions.

The property/casualty sector has suffered from sharp declines in asset values resulting from weak investment conditions and other difficulties in the financial markets, but generally to a lesser degree than other sectors, S&P said in its report, "Property/Casualty Insurers Maintain Financial Strength Despite A Weak Economy."

According to the article, S&P believes that P&C insurers emerged strong from this turmoil because they had built up significant capital buffers during periods of favorable investment conditions and hard-market pricing. Moreover, the report asserts that the P&C sector remains financially strong, and is relatively well positioned to handle any future investment volatility.

The property/casualty industry's combined ratio in 2009, S&P says, improved to 101% from 105% in 2008, citing research from the Insurance Services Office. Excluding mortgage and financial guaranty insurers, this ratio improved to 99.3% from 101%. Partly offsetting the improvement in underwriting results, insurers' net investment income (interest income plus dividends) fell a record 8.7% in 2009 to $47 billion.

"During this recent period of uncertainty and resulting impairments, the majority of P&C insurers demonstrated a commitment and ability to hold asset securities with depressed market values until prices recovered or sales were prudent," says S&P credit analyst Polina Chernyak. "Nevertheless, weaker risk management, aggressive underwriting, inferior catastrophe management and the potential for inflation to wipe out reserve redundancies because of quicker expected payouts forced a handful of companies to sell undervalued securities," which Chernyak believes could impair liquidity and capital adequacy, and could put pressure on the ratings.