Despite the tough economic times continuing to take their toll on the property/casualty industry, insurers are continuing to stand tall. A new report from ISO and the Property Casualty Insurers Association of America (PCI) finds that the overall decline in surplus and net losses notwithstanding, P&C insurers remain well capitalized and in good position to ride out the remainder of the storm.

First-quarter 2009 financial results show that private U.S. property/casualty insurers had $437.1 billion in policyholders’ surplus (or statutory net worth) on March 31, 2009. Insurers also had $554.4 billion in loss and loss adjustment expense reserves to cover the cost of settling claims that had already occurred, and another $201.5 billion in unearned premium reserves set aside to cover losses arising during the remaining term of policies in effect on March 31, bringing the total funds available to cover losses and other contingencies to just under $1.2 trillion. Key leverage ratios, such as the premium-to-surplus ratio, show that the property/casualty insurance industry remained well capitalized, though policyholders’ surplus fell $19 billion, or 4.2 percent, from $456.1 billion at year-end 2008.

“Property/casualty insurers absorbed a pounding in first-quarter 2009, as the recession deepened and stock markets tumbled. Based on quarterly data extending back to 1986, insurers’ $1.3 billion net loss after taxes for the first three months of this year is the worst first-quarter result on record,” says Michael Murray, ISO’s assistant VP for financial analysis. “The perfect storm that beset the insurance industry in 2008 continued unabated in first-quarter 2009. Yet, aside from some problems in the mortgage and financial guaranty sector, the property/casualty insurance industry emerged intact.”

Contributing to the decline in policyholders’ surplus in first-quarter 2009, insurers suffered a $1.3 billion net loss after taxes, and $16.4 billion in unrealized capital losses on investments (not included in net income after taxes). Other deductions from surplus in Q1 2009 included $2.1 billion in dividends paid to stockholders and $0.1 billion in miscellaneous other surplus changes. Partially offsetting the deductions from surplus, insurers raised $0.9 billion in new funds paid in (new capital).

The property/casualty insurance industry’s $1.3 billion net loss after taxes for Q1 2009 constitutes a $9.8 billion adverse swing from the industry’s $8.5 billion in net income after taxes in first-quarter 2008. And reflecting the swing to a net loss after taxes, the insurance industry’s annualized overall rate of return on average policyholders’ surplus dropped to -1.2% in first-quarter 2009 from 6.6% in first-quarter 2008.

Insurers’ net loss after taxes for the first three months of 2009 resulted from a combination of losses on underwriting and deterioration in investment results. In Q1 2009, insurers withstood $2.5 billion in net losses on underwriting — more than four times the $0.6 billion in net losses on underwriting in Q1 2008. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — worsened to 102.2% in the first three months of this year from 99.9% in the first three months of 2008.

Insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell 69.9% to $3.7 billion in Q1 2009 from $12.4 billion a year earlier.

Partially offsetting the deterioration in underwriting and investment results, insurers’ miscellaneous other income rose to $0.4 billion in the first three months of 2009 from $0.2 billion in the corresponding portion of 2008, and insurers’ federal income taxes declined to $2.9 billion from $3.6 billion.

The figures are consolidated estimates for all private U.S. property/casualty insurers based on reports accounting for at least 96% of all business written by such insurers.

“With so many once iconic banks, Wall Street institutions, and industrial giants having been done in by the recession and the crisis that swept through the financial system, property/casualty insurers’ policyholders can be secure in the knowledge that property/casualty insurers have the financial resources to fulfill their obligations,” says David Sampson, PCI president and CEO. “Even as other financial service providers succumbed to the recession and financial crisis, property/casualty insurers’ conservative investment strategies and prudent risk management enabled them to continue quietly going about their business — underwriting policies, paying claims, providing millions of jobs, and buying the state and municipal bonds that finance critical projects all across the nation — and all without burdening taxpayers.”

The recession and credit crisis took a disproportionate toll on results for mortgage and other financial guaranty insurers. As economic conditions deteriorated and foreclosure and default rates rose, ISO estimates that mortgage and financial guaranty insurers’ annualized rate of return fell to negative 149.3% in Q1 2009 from -89% in Q1 2008. Excluding mortgage and financial guaranty insurers, the insurance industry’s rate of return declined to 2.2% for the first three months of 2009 from 9.5% for the first three months of last year, as the industry’s net income fell 80.1% to $2.4 billion from $11.9 billion.

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