P/C Industry Profitability: In Recovery But Still Inadequate

The first evidence of a rebound in profitability for property/casualty insurers in the wake of the financial crisis that began in mid-2007 is apparent in the first-half 2009 results just released by ISO and the Property Casualty Insurers Association of America. The industry’s annualized statutory rate of return on average surplus of positive 2.5 percent during the first half of 2009 was down from 5.5 percent for the first half of 2008, but up from the negative 1.2 percent during the first quarter of 2009 and positive 0.5 percent for all of 2008. In his commentary on the results, I.I.I. president Dr. Robert Hartwig notes that the industry’s profitability was pulled back into positive territory primarily by a 60 percent reduction in realized capital losses, which shrank to $3.2 billion in the second quarter from $8.0 billion in the first, reflecting improved stock and bond market conditions. Secondary factors included improved underwriting conditions, with the second quarter combined ratio falling to 99.5 from 102.2 in the first quarter, leaving the first half combined ratio at 100.9. In another sign of recovery, capacity in the industry (as measured by policyholders’ surplus) rebounded for the first time in two years. Policyholders’ surplus increased by $25.9 billion or 5.9 percent to $463.0 billion during the second quarter from $437.1 billion at the end of the first quarter. Hartwig observes that this reversal is notable and important given that p/c insurance industry capacity had plunged by an alarming $84.7 billion or 16.2 percent over the previous five quarters from the pre-crisis peak of $521.8 billion at the end of the second quarter of 2007. The return to profitability and rising capacity during the first half are primarily attributed to improved investment market performance. At the same time, persistent soft market conditions and a deep recession have severely impacted the p/c insurance industry’s growth. While insurers remain cautious about the economy and financial market conditions, there is guarded optimism that both will continue to improve as the industry moves toward 2010.

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