Property and Casualty Insurers See Profits Slip

Profits of the nation's property/casualty insurers decreased 1.4% to $51.4 billion for the first nine months of 2007, from a peak of $52.1 billion in the same period in 2006.

Although large insurers have begun reporting year-end results, the latest full set of regulatory data for the more than 2,600 property/casualty insurers reflects results through Sept. 30, 2007.

The property/casualty industry comprises more than 30 lines of business, and across the board premiums are flat or declining as the industry suffers through a soft market.

As a result of declining underwriting revenues, the industry looks to investment gains to compensate for the declines. Investment gains through third quarter 2007 hit $49.9 billion, up 13.7% from $43.9 billion in 2006. At the same time, gains from underwriting business fell 25.5% to $19.3 billion through third quarter 2007 from $25.9 billion in 2006.

Melissa Gannon, vice president of insurance and bank ratings for TheStreet.com Ratings, discusses:

Q: Will insurers raise rates to make up for declining profits?

A: Not yet. The soft market is expected to last two to three more years, so rates generally will stay flat or decline until the market hits the trough of the cycle.

As a result of declining underwriting profitability across all lines of business, TheStreet.com Ratings' quarterly review resulted in 29 downgrades and 11 upgrades. The relatively large number of downgrades also reflects the crisis in the mortgage and financial guaranty, or bond, insurance industry, which accounted for 10 of the 29 downgrades.

Q: What impact has the subprime mortgage crisis had on the insurance industry?

A: Mortgage and financial guaranty insurers have obviously been the hardest hit. With losses at historic levels, many are seeking external sources to shore up capital. The depth of total losses is yet to be seen, but there's no doubt that these insurers have, and will continue to, suffer significant losses. Based on the data of the entities underwriting the coverage, we downgraded the financial strength ratings of ten insurers. Four companies owned by PMI Group. PMI were downgraded: PMI Insurance Company, PMI Mortgage Guaranty Company, Financial Guaranty Insurance Company, and PMI Mortgage Insurance Company. Two companies owned by Radian GroupRDN were downgraded: Radian Guaranty and Amerin Guaranty.

The five largest mortgage insurers:

Company	Home State	Financial Strength Rating	Parent Name (Ticker)	Mortgage Guaranty Premium ($Mil)
Mortgage Guaranty Ins Corp	WI	C-	MTG	1,035.7
Radian Guaranty Inc	PA	C-	RDN	669.0
PMI Mortgage Ins Co	AZ	D+	PMI	558.7
Genworth Mortgage Ins Corp	NC	B-	GNW	429.4
United Guaranty Residential Ins Co.	NC	C	AIG	353.4
A=Excellent; B=Good; C=Fair; D=Weak; E=Very Weak

The five largest bond insurers:

Company	Home State	Financial Strength Rating	Grname	Financial Guaranty Premium ($Mil)
Amback Assurance Corp	WI	B-	ABK	746.2
MBIA Ins Corp	NY	C+	MBI	739.0
Financial Security Assurance Inc	NY	B-	FSF	252.0
Financial Guaranty Ins Co	NY	C	PMI	212.5
Radian Asset Assurance Co	NY	A-	RDN	160.9
A=Excellent; B=Good; C=Fair; D=Weak; E=Very Weak

While we may see an insurer fail before this crisis is over, it's important to note that of the 83 insurers that write either mortgage or bond insurance, TheStreet.com Ratings currently considers 61 to be financially sound. Fourteen are considered weak, and the remaining are not rated.

Q: Is the industry being affected in any other way by the mortgage crisis?

A: Yes, but at nowhere near the same level of severity. As a result of the more than $230 billion in writedowns from the mortgage crisis, investor class action lawsuits have kicked in. That means companies that write directors and officers liability insurance will be affected. A report by Advisen Ltd., released Feb. 11, estimates D&O losses of $3.6 billion in 2007 and 2008 and lists the five largest D&O insurers as AIGAIG, Lloyd's, XLXL, ChubbCB, and TravelersTRV. These five companies make up 63% of the market.

Q: Do you think the homeowners insurance industry has improved since there have been two seasons now with no major storms?

A: The homeowners insurance market continues to be very tenuous in coastal areas of the country. Florida, in particular, is struggling to stabilize its market with the latest announcement coming from State Farm, who announced this week that it will stop writing new policies for coastal residents. Florida officials say that the void in capacity can be filled by new insurers that continue to enter the market, but these insurers with such little experience in the market tend to be less financially sound.