Best Projects 2008 P-C Industry Net Income Down 80%

By Phil Gusman
National Underwriter News
February 10, 2009

Net income for the property-casualty industry is expected to plunge 80 percent to $14 billion, due to deteriorating underwriting and investment results, according to a new A.M. Best report.

The "U.S. Property-Casualty Review & Preview" report noted that the industry's operating results "were marked by ongoing soft market conditions, above-average catastrophe losses, higher underwriting losses in the mortgage and financial guaranty segments, continued turmoil in the credit markets, and extreme volatility in equity markets."

Aside from weak investment returns, the Oldwick, N.J.-based rating firm said the industry should expect an underwriting loss of $21.5 billion in 2008, after gains of $19.5 billion and $31.6 billion in 2007 and 2006, respectively.

"Because of the one-two punch of deteriorating underwriting results and weaker investment returns, the U.S. [p-c] industry's policyholders' surplus is expected to show a 10 percent decrease to $485.3 billion at year-end 2008 from $538.2 billion in 2007," the report stated.

Best said the industry's combined ratio deteriorated 9.1 points to 104.7 in 2008, the highest combined ratio since 2002's figure of 107.2. The combined ratio was driven by a 9.2-point increase in the loss and loss-adjustment expense ratio, which Best said was attributable to higher catastrophe losses and "considerable underwriting losses in the mortgage and financial guaranty segments."

Despite mortgage and financial guaranty insurers generating less than 2 percent of the industry's total net premiums written, A.M. Best said they "significantly influenced the industry's performance in 2008," collectively reporting an underwriting loss of $7.7 billion and a combined ratio of 241.7.

Net premiums written (NPW) for the industry is estimated to be down 0.8 percent in 2008 after falling in 2007 "for the first time in decades," said Best. The back-to-back decrease "marks the first time that NPW has decreased in consecutive years since 1932 and 1933," according to the report.

For 2009, Best said it expects a slowing of rate decreases and some flattening of rates in most lines, but "the effect of price increases will not be realized fully until 2010, and the continuation of soft rates and competition in most lines of business will continue to impact future results."

Some areas, such as directors and officers and errors and omissions, are already seeing price increases because of sharply increased claims activity, the report noted.

Best said it also expects relatively flat growth in NPW, an underwriting loss of approximately $6.4 billion, and a combined ratio of 101.1 assuming normal levels of catastrophes in 2009.

But Best said it "believes the overall industry will continue to maintain adequate balance sheet strength, profitability and liquidity in 2009. Additionally, with a modest semblance of stability, price levels continue to support reasonable profitability. As a result, A.M. Best has maintained the stable outlook for all three segments--commercial lines, personal lines and the U.S. reinsurance market."

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