Best: U.S. P/C Industry's Profits Fall Nearly 80%

Deteriorating underwriting and investment results drove the U.S. property/casualty industry’s net income down by nearly 80% to $14.0 billion in 2008.

• Declining underwriting results and weak investment markets have brought property/casualty insurers to a critical point where future profitability depends on strict adherence to underwriting and reserving discipline—even at the expense of market share.
• After falling in 2007, net premiums written are expected to show another decrease for 2008, driven by competition in practically all lines and leakage of premium to non-U.S. companies, as well as macroeconomic factors that include the current recession, the credit crisis, the housing correction, rising unemployment and higher energy prices. This is the first back-to-back decrease in premium since 1932-33.
• Two consecutive years of underwriting profits are expected to give way to an underwriting loss of $21.5 billion for 2008, driven by a continued soft market, sizable and frequent weather-related losses, and the impact of significant losses in the mortgage and financial guaranty sectors.
• A.M. Best Co. estimates the industry will recognize nearly $11.0 billion of favorable loss-reserve development in 2008—even higher than the $9.0 billion recorded in 2007—thus further eroding the industry’s overall loss reserve position.

• Uncertainty in investment markets will continue to impact most strategic decisions including pricing and participation in mergers and acquisitions (M&A). As balance sheets begin to weaken, the window for sensible M&As may be closing.
• Although policyholders’ surplus decreased an estimated 10% in 2008, excess capital absorbed much of the decrease, and the overall industry remains sufficiently capitalized to meet the current challenges in underwriting and the financial markets.

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