Fundamentals Sound

The p/c industry yesterday reported a 57.4 percent drop in net income after taxes to $13.9 billion in the first half of 2008, down from $32.7 billion in first half 2007. The industry’s annualized statutory rate of return on average surplus fell to 5.4 percent in first half 2008 from 13.1 percent in first half 2007. The sharp decline in profitability is partially attributable to a spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the p/c industry.

Despite the deterioration in profitability, in his commentary on the results I.I.I. president Dr. Robert Hartwig says a case can be made that the p/c industry is a pillar of strength in the financial services sector. Why? Dr. Hartwig explains that insurer investment portfolios are generally conservatively managed and insurers have avoided some of the problems of the investment banks and many other financial institutions because of their superior risk management model. He goes on: “The reality is that throughout its nearly 200-year history in the United States, the p/c insurance industry has endured every conceivable economic circumstance and crisis and managed to persevere.”

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