Property and Casualty Insurers Take a Pounding

No, just the opposite. Net investment gains for 2007 were up 11.1% from $63.5 billion in 2006 to $70.5 billion in 2007. This is comprised of two components: net investment income and net realized capital gains. Net investment income increased $1.6 billion, a mild 2.6% increase over 2006 results. On the other hand, net realized capital gains, which are profits on the sale of investments, increased a whopping 153%, from $3.5 billion in 2006 to $9 billion in 2007. This increase is what prevented the decline in overall profits from being much worse and was primarily due to $3.7 billion earned on the sale of common stock during the year.

What's notable is that insurers now hold $3.2 billion in junk bonds rated single B or lower. This is an increase of $1.3 billion, or 913.3%, over 2006 levels. Although this represents less than half of a percentage point of the industry's capital and reserves, the amount could increase substantially as the fair value of insurers' non-government guaranteed bonds deteriorate further under the weight of the subprime mortgage crisis. General Reinsurance Corporation and Government Employees Insurance Company, both subsidiaries of Berkshire Hathaway BRK.A, have the largest increases of single-B or lower bonds from 2006 to 2007. They are $447.8 million and $282.4 million respectively. In addition, 203 other insurers saw increases in these very low-quality bonds.

Some of the large publicly traded insurers have already reported heavy first-quarter investment losses. Are you expecting more of the same, and does that concern you from a financial strength perspective?

Yes. I'm sure more first-quarter investment losses will be announced. Among others, Prudential PRU, Hartford Financial Services HIG and MetLife MET have announced major declines in first-quarter profits caused by investment losses. All three companies are very well capitalized and can absorb this hit. The industry as a whole has experienced a $280.6 million, or 75%, increase in capital and surplus since 2001. And risk-based capital ratios are at their highest levels. So the industry is very stable and able to withstand losses in the investment arena.