U.S. Property/Casualty Industry to Report $59.2 Billion in Profits in 2007

But a decline in premiums, the first since 1943, and soft 2008 market forecast could mean tough times ahead for profits.

By Cyril Tuohy

There was no question that the U.S. property/casualty industry was going to have another good year in 2007. The only question was how good. Now the numbers are in, and the industry's expected to show a profit of $59.2 billion, according to a new estimate by A.M. Best & Co.

That's $11.4 billion less than last year's $70.6 billion in profit, but not too shabby nonetheless.

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The industry generated $19.3 billion in net underwriting income and $54.9 billion in net investment income in 2007, compared with $31.7 billion in net underwriting income and $54.7 in net investment income in 2006.

"Underwriting results benefited from still-favorable underwriting conditions, improved loss-frequency trends, a high level of reserve releases and lower-than-expected catastrophe losses," wrote the authors of the report.

In addition, policyholder surplus, the amount of money set aside to pay future claims, is expected to grow for the fifth straight year, increasing by an estimated $45.5 billion to $548.2 billion in 2007, up from $502.7 billion in 2006.

Best expects the industry's 2007 combined ratio to top out at 95.6, up from a combined ratio of 92.4 in 2006.

Good news all around--though not unexpected.

Yet what has some analysts looking more closely at the future health of the U.S. property/casualty industry is the 1.2 percent decline in premiums last year, compared with a 3.9 percent premium increase in 2006. It was the first such decline since 1943, the report noted.

A weakening economy, more competition both from the insurance industry itself and the capital markets, combined with less demand in the Florida marketplace are expected to translate into another premium decline in 2008, the report concluded.

"As falling rates continue to erode operating margins for U.S. insurers, A.M. Best remains concerned with the industry's ability to sustain adequate rates in the near term and its ability to maintain underwriting discipline in light of a slowing economy, attractive cash flows and rising surplus levels," according to the authors of the report.

Given these warning signs, then, the key question for the industry is just how long can it continue turning a profit?

Speaking at an executive panel discussion in early January, some of the nation's top insurance CEOs said that, so long as the economic slowdown was short, the industry would manage to come out in fairly good shape.

"We will be able to bounce back if it is short," said Ramani Ayer, chairman and CEO of The Hartford. The probability of a severe recession, he also said, was "extremely low."

Mindful of the nation slipping into recession, the Bush administration has pledged to offer millions of households tax rebates, and the Federal Reserve in January cut its benchmark long-term interest rate by 1.25 percent.

March 1, 2008

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