The good news is that P&C insurers’ overall profitability as measured by their rate of return on average policyholders’ surplus (or statutory net worth) increased to 5.8% last year from 0.6% in 2008. However, their $28.3 billion in net income for 2009 is less than half of their $62.5 billion in net income for 2007, which means recovery from the recession and financial crisis remains incomplete, according to ISO and the Property Casualty Insurers Association of America (PCI).

Similarly, insurers’ 5.8% overall rate of return for last year was less than half of their 12.4% rate of return for 2007.

“Though insurers’ 5.8% rate of return for 2009 was nearly 10 times their 0.6% rate of return for 2008, insurers’ overall rate of return remained below its long-term average,” says Michael Murray, ISO’s assistant VP 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%. 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%, up from negative 133.4% in 2008. Other property/casualty insurers’ rate of return for 2009 was 7.3%, up from 4.4% a year earlier.

Private U.S. property/casualty insurers’ net income after taxes rose to $28.3 billion in 2009 from $3 billion the year before. ISO and PCI attribute the increases in net income and rate of return in 2009 to a decrease in net losses on underwriting, which 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.

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

Reflecting the industry’s net income and unrealized capital gains on investments (not included in net income), policyholders’ surplus—insurers’ net worth measured according to Statutory Accounting Principles—rose 11.8% 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% compared with surplus at year-end 2007.

“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,” says David Sampson, PCI president and CEO. “While attention has been focused on consumers’ ability to obtain mortgages and on businesses’ access to credit, people would not be able to buy homes or autos, and businesses would not be able to operate, without the property casualty industry. Throughout the economic crisis, the property casualty industry has remained strong and stable compared to other financial services sectors, such as the banking sector which experienced 140 failed banks last year and another 42 year-to-date through April 9. These results are a testament to property casualty insurers’ strong balance sheets and prudent risk management. 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.”

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