III - Property/Casualty: Financial

INSURANCE

PROPERTY/CASUALTY INSURANCE

Property/casualty insurance covers the property and liability losses of businesses and individuals. These losses range from damage and injuries resulting from car accidents to the cost of lawsuits stemming from faulty products and alleged professional misconduct. In terms of premiums written, private auto insurance is by far the largest single line, nearly four times greater than the next largest line, homeowners multiple peril. Property/casualty insurance companies tend to specialize in commercial or personal insurance, but some sell both, and a number of companies are expanding into other financial services sectors, including personal banking and mutual funds.

Property/casualty insurers invest largely in high-quality liquid securities, which can be sold quickly to pay for claims resulting from a major hurricane, earthquake or man-made disaster such as a terrorist attack.

PROPERTY/CASUALTY INSURER FINANCIAL ASSET DISTRIBUTION, 2003-2007

($ billions)

	2003	2004	2005	2006	2007
Total financial assets	$1,059.7	$1,162.2	$1,243.8	$1,329.3	$1,373.6
Checkable deposits and currency	34.6	25.9	21.0	29.9	42.7
Security repurchase agreements (1)	52.8	63.1	68.9	66.0	53.8
Credit market instruments	625.2	698.8	765.8	813.5	840.0
U.S. government securities	180.1	183.4	187.1	197.8	180.9
Treasury	64.7	71.3	69.2	75.8	55.1
Agency- and GSE (2)-backed securities	115.4	112.1	117.9	122.0	125.8
Municipal securities	224.2	267.8	313.2	335.2	368.7
Corporate and foreign bonds	218.9	245.3	262.8	277.0	285.6
Commercial mortgages	2.1	2.4	2.7	3.5	4.8
Corporate equities	178.4	196.6	199.5	227.0	235.3
Trade receivables	79.3	79.6	82.1	87.0	85.4
Miscellaneous assets	85.0	93.0	100.7	99.0	108.7
(1) Short-term agreements to sell and repurchase government securities by a specified date at a set price. (2) Government-sponsored enterprise. Source: Board of Governors of the Federal Reserve System, June 5, 2008.

CAPITAL AND SURPLUS

A property/casualty insurer must maintain a certain level of surplus to underwrite risks. This financial cushion is known as “capacity” or policyholders' surplus. When the industry is hit by high losses, such as a major hurricane, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk and/or raising additional capital. The industry's policyholders' surplus reached $499.4 billion at year-end 2006, according to Highline Data.

Property/casualty insurers rarely show an overall underwriting profit, i.e., a net gain from premiums after costs of sales, dividends to policyholders, loss payments and loss adjustment costs (which include litigation costs). When the combined ratio (costs as a percentage of premiums) is over 100, the difference is generally covered by investment income from a number of sources, including capital and surplus accounts, money set aside for loss reserves and unearned premium reserves, and capital gains. In 2006 the combined ratio was 92.5 after dividends, which means insurers paid out 92.5 cents for every dollar in earned premium. The 2006 combined ratio was the best since 1949 and stands tied for the fifth best result since 1920.

PROPERTY/CASUALTY INSURANCE INDUSTRY INCOME ANALYSIS, 2002-2006 (1)

($ billions)

	2002	2003	2004	2005	2006
Net written premiums	$369.7	$404.4	$424.1	$425.7	$443.8
Percent change	14.3%	9.4%	4.9%	0.3%	4.3%
Earned premiums	$348.5	$386.3	$413.8	$417.7	$435.8
Losses incurred	238.8	238.7	247.8	256.3	231.1
Loss adjustment expenses incurred	44.8	50.0	53.1	55.1	52.6
Other underwriting expenses	93.8	100.7	106.8	109.8	117.5
Policyholder dividends	1.9	1.9	1.7	1.9	3.4
Underwriting gain/loss	-30.8	-4.9	4.3	-5.6	31.2
Investment income	37.2	38.6	40.0	49.7	52.3
Miscellaneous income/loss	-0.8	0.0	-0.3	1.0	1.0
Operating income/loss	5.6	33.8	44.0	45.1	84.6
Realized capital gains/losses	-1.2	6.6	9.1	9.7	3.4
Incurred federal income taxes/credit	1.3	10.3	14.6	10.7	24.2
Net income after taxes	3.0	30.0	38.5	44.2	63.7
(1) Data in this chart may not agree with similar data shown elsewhere due to different sources. Source: ISO.

The U.S. property/casualty industry posted a $31.2 billion net gain on underwriting in 2006, driven by a sharp decline in catastrophe losses from hurricanes and other natural disasters that year. This contrasts with an underwriting loss of $5.6 billion the previous year.

TOP TWENTY U.S. PROPERTY/CASUALTY COMPANIES BY REVENUES, 2007 (1)

($ millions)

Rank	Group	Revenues	Assets
1	Berkshire Hathaway	$118,245	$273,160
2	American International Group	110,064	1,060,505
3	State Farm Insurance Cos.	61,612	181,422
4	Allstate	36,769	156,408
5	Travelers Cos.	26,017	115,224
6	Liberty Mutual Insurance Group	25,961	94,679
7	Hartford Financial Services	25,916	360,361
8	Nationwide	22,962	161,090
9	Loews	17,920	76,079
10	Progressive	14,687	18,843
11	United Services Automobile Assn.	14,418	67,177
12	Chubb	14,107	50,574
13	Assurant	8,454	26,750
14	First American Corp.	8,196	8,648
15	American Family Insurance Group	6,969	16,004
16	Safeco	6,209	12,640
17	W.R. Berkley	5,554	16,832
18	Fidelity National Financial	5,524	7,556
19	Auto-Owners Insurance	5,129	13,680
20	Erie Insurance Group	4,737	14,215
(1) Revenues for insurance companies include premium and annuity income, investment income and capital gains or losses but exclude deposits. Source: Fortune.

DISTRIBUTION CHANNELS

Property/casualty (P/C) insurance companies can be grouped into two main categories based on their main distribution channel: agency writers; whose products are sold by independent agents or brokers, representing several companies—and direct writers—which sell their own products through captive agents, by mail, telephone, the Internet and other means. There is a degree of overlap as many insurers use multiple channels.

In 2006 agency writers accounted for 52.3 percent of P/C insurance net premiums written, direct writers accounted for 47.4 percent and other types of writers accounted for 0.3 percent, according to A.M. Best.
In the personal lines market, direct writers accounted for 66.9 percent of net premiums written in 2006, agency writers accounted for 33.0 percent and other types of writers accounted for 0.1 percent.
The same year agency writers accounted for 70.3 percent of commercial P/C net premiums written, direct writers accounted for 29.3 percent and other types of writers accounted for 0.4 percent.

Traditionally, there has been a distinction between agents and brokers, with agents (whether captive or independent) representing the insurance company and brokers representing the client. Recently, the line between agencies and brokers has blurred, with intermediary firms operating as brokers and agents, depending on their jurisdiction and the type of risk.

TOP TEN COMMERCIAL INSURANCE BROKERS OF U.S. BUSINESS BY REVENUES, 2006 (1)

($ millions)

Rank	Company	Brokerage revenues
1	Marsh & McLennan Cos. Inc.	$5,341.7
2	Aon Corp.	2,750.7
3	Arthur J. Gallagher & Co.	1,250.9
4	Willis Group Holdings Ltd.	1,100.3
5	Wells Fargo Insurance Services Inc.	1,008.7
6	Brown & Brown Inc.	864.7
7	BB&T Insurance Services Inc.	842.3
8	Hilb Rogal & Hobbs Co.	682.8
9	USI Holdings Corp.	546.3
10	Lockton Cos. LLC	453.4 (2)
(1) Companies that derive more than 20 percent of revenues, generated by U.S.-based clients, from commercial retail brokerage. (2) Fiscal year ending April 30. Source: Business Insurance, July 16, 2007.

PROPERTY/CASUALTY INSURANCE INDUSTRY CONCENTRATION

According to ISO, concentration in the property/casualty insurance sector increased from 229 in 1980 to 344 in 2006 on the Herfindahl scale, used to measure market concentration. The U.S. Department of Justice classifies any score under 1,000 as unconcentrated. A score over 1,800 means an industry is highly concentrated.

MARKET SHARE TRENDS BY SIZE OF INSURER, 1986-2006 (1)

(1) Based on net premiums written, excluding state funds.

Source: ISO.