The U.S. property/casualty insurance industry’s net income after taxes fell to $8.2 billion in first-quarter 2008 from $16.2 billion in first-quarter 2007 and a cyclical peak of $17.7 billion in first-quarter 2005. Reflecting the declines in net income, the property/casualty industry’s annualized rate of return on average policyholders’ surplus (statutory net worth) dropped to 6.4 percent in first-quarter 2008 from 13.2 percent in first-quarter 2007 and 17.9 percent in first-quarter 2005.

Contributing to the $8 billion, or 49.3 percent, decline in net income in first-quarter 2008, the industry posted $0.6 billion in net losses on underwriting — an $8.9 billion adverse swing from the $8.3 billion in net gains on underwriting in first-quarter 2007. Investment results also deteriorated, with net investment gains declining $2.8 billion, or 18.8 percent, to $12.2 billion in the first three months of 2008 from $15 billion in the first three months of 2007.  Partially offsetting these developments, insurers’ miscellaneous other income rose $2.1 billion to $0.2 billion through the first three months of 2008 from negative $1.8 billion through the first three months of 2007, and insurers’ income taxes fell $1.6 billion to $3.6 billion from $5.2 billion.

The sharp decline in profitability is primarily attributable to a spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the property/casualty insurance industry, according to an analysis published by the Insurance Information Institute.  The decline in profitability was led by a substantial deterioration in underwriting performance in those two segments, pushing the first-quarter combined ratio up to 99.9, more than 8 points above the 91.7 combined ratio for the same quarter last year and 4.3 points above the 95.6 combined ratio for full-year 2007.

The mortgage and financial guarantee lines—with $2.2 billion in net written premiums during the first quarter—accounted for just 2 percent of the $110.5 billion industrywide total. Nevertheless, according to ISO, this segment’s loss and loss adjustment expenses ballooned to $5 billion—an increase of 570.3 percent—propelling its combined ratio to an unprecedented 266.6 for the quarter compared to 69.6 during the first quarter of 2007. That was enough to add 3.2 points to the industrywide combined ratio, which finished the quarter at 99.9—its highest level in six years. Excluding mortgage and financial guarantee insurers reveals declines of a more modest and cyclical nature, with return on average surplus coming in at 9.5 percent. Read the full commentary.

July 2, 2008