Property and Casualty Insurers Take a Pounding

Profits of the nation's 3,100 property and casualty insurers declined for the first time since 2001, down 7.6% from record profits of $76.1 billion in 2006 to $70.3 billion in 2007.

This decline was driven by a 34.4% decrease in net underwriting profits -- the core business of selling insurance -- which fell from a record high of $35.7 billion in 2006 to $23.4 billion in 2007.

With the full set of regulatory data now available for 2007 and the industry facing what could be a prolonged soft market, we sat down with Melissa Gannon of TheStreet.com Ratings to discuss 2007 results.

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An almost $6 billion drop in profits seems significant. If this downturn continues, how much can the industry absorb?

The industry can actually absorb quite a bit. Putting this in historical prospective, insurers have been increasingly profitable since their last aggregate net loss of $3.2 billion in 2001. From 2002 through 2007, insurers enjoyed a combined $281.9 billion in profits, which has resulted in a record level of capital and surplus of $655.8 billion at Dec. 31, 2007.

Since we started following the P&C industry in 1993, there have been exactly two years in which the industry enjoyed a profit on its core underwriting business --last year and this year. So while underwriting profits were down in 2007, that follows a record year where underwriting results were not just positive but an extremely strong $35.7 billion. Having said that, if pricing continues to fall on nearly all lines of business, that underwriting profit could be mostly wiped out in 2008 and completely in 2009.

What about investment results? Did those fall also, contributing to the loss?