Equity Markets Stink

Underwriting and investments losses lead to 87 percent drop in insurers' 1Q net income, and things haven't improved much since. Good riddance to the first half of 2009.

By DAN REYNOLDS, senior editor of Risk & Insurance®

A report this week from Oldwick, N.J.-based ratings agency A.M. Best Co. confirmed what the company had suggested a few weeks ago. The country's property/casualty sector, buffeted by an anemic stock market, continued high catastrophe losses and strangling mortgage losses, suffered significant earnings degradation in the first quarter.

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Researchers with A.M. Best estimate that the U.S. property/casualty sector's net income, which includes underwriting and investment income, fell to $1.2 billion in the first quarter of 2009, from $9.4 billion in the first quarter of 2008, a drop of 87 percent. Part of that drop was due to the weak performance of U.S. stocks and bonds.

The P/C industry's net investment income in the first quarter fell $1.2 billion, to $12.3 billion, down from $13.5 billion for the same period in 2008. Even with a strong performance by the stock market in March, the Dow Jones Average overall in the first quarter fell 13.3 percent.

The second quarter should be a much different story, at least relative to the first, in terms of the industry's investment income. On March 31, at the end of the first quarter, the Dow stood at 7608.92. Three months later, on June 30, the Dow was at 8447.00, an increase of some 11.01 percent.

THIRD QUARTER: MORE SLUMP?

The third quarter, though, has begun sluggish. Many saw the second half of the year as the time when this extended economic slump, which goes all the way back to the fourth quarter of 2007, was finally going to end. Well, it's not happening yet.

July has gotten off to a limp start in terms of investment returns. At the end of the first week of the month, the DJIA was down more than 3 percent and investors seemed to be biting their fingernails in advance of the earnings season, which Alcoa was set to kick off on July 8.

There is still no growth in gross domestic product on a quarter-to-quarter basis; the economy continues to shed hundreds of thousands of jobs per month; and net written premiums, which depend on both of those preceding factors, continue to suffer.

UNDERWRITING RESULTS

According to Best, U.S. property/casualty net premiums written in the first quarter fell $4.2 billion to $107.6 billion, or 3.8 percent, compared with the year-ago quarter. Underwriting losses before reinsurance recoverables due to catastrophes were $3 billion in the first quarter, which contributed 2.8 percentage points to the P/C industry's combined ratio.

What A.M. Best senior financial analyst Ed Keane told Risk & Insurance® a couple weeks ago, which appears to be holding true so far, is that the U.S. residential mortgage market is going to continue to be the difference, in a negative sense, between underwriting profits and losses in the overall U.S. property/casualty sector.

Mortgage and financial guaranty segments of the P/C industry reported an underwriting loss of $1.9 billion in the first quarter and a combined ratio of 220.8. Even though that segment is a small part of the overall P/C sector, losses there are significant enough to make the difference between a combined ratio less than 100 and a combined ratio of more than 100.

Mortgage losses, though painful, still shouldn't be anything near in 2009 what they were in 2008. A.M. Best predicts a P/C combined ratio of 101.1 for 2009, down significantly from the 104.7 that the industry struggled with in 2008.

July 9, 2009

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