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Property/Casualty Insurers Badly Burned

In the first quarter, the industry's profits were down 45% from the previous year.

The nation's property and casualty insurers suffered a combined 45% decline in first-quarter 2008 profits compared to the same period last year. Through the first three months of the year, the industry earned $9.4 billion, compared to $17 billion in the same period last year. That's down from record first-quarter profits of $17.8 billion in 2005.

In the midst of a soft market that's not expected to end any time soon, the industry's underwriting gains were virtually wiped out, falling to a mere $65 million in the first quarter, compared with $9 billion the prior year. This is on the heels of a

sharp decline in 2007


Net earned premium was essentially flat, down a slight 0.4%, while net losses (after reinsurance) were up $7.9 billion, or 11%, to $79.4 billion. Compounding the soft-market effects is the subprime mortgage crisis, which has lead to massive claims losses for mortgage and financial guaranty insurers.

Up until 2005 standard practice for the industry was to underwrite at a loss in the name of competitive pricing. Investment income would make up the difference plus more. That had changed in recent years when insurers were more committed to writing new business at a profit. The three years of underwriting profits helped to dramatically shore up capital and surplus.

Based on catastrophes during the first half of the year, second-quarter underwriting results could very likely be even worse than first quarter. As reported by

The Wall Street Journal

yesterday, the Property Claims Services Unit of the Insurance Services Office (ISO) identified 24 catastrophes so far this year totaling claims of $8.9 billion. This is more than claims for all of 2007.

The triple whammy to first-quarter profits was a $2.2 billion decline in net realized gains on investments, resulting in a $371 million dollar net realized loss. This is the first net realized investment loss suffered by the industry during the first quarter since Ratings' predecessor, Weiss Ratings, began tracking the industry in 1994.

While nearly half of all P&C insurers reported a net loss (1,471 of 2,970 companies), the 20 companies with the greatest year-over-year decrease accounted for $6.8 billion, or 90%, of the total profit decline. Of those 20, 10 were mortgage or financial guaranty insurers, making up $4 billion, or 53%, of the total decline in profits.

MBIA Insurance Corp, owned by


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(MBI) - Get MBIA Inc. Report

, suffered the largest decline of profits of any insurer in the industry. Its $1.2 billion decline in profits was driven by a $1.3 billion increase in claims losses and expenses, while premiums were down $27 million, or 14.7%, to $158 million. The company experienced $1.1 billion in losses on $158 million in net premium.

Ambac Assurance Corp, owned by

Ambac Financial Group


, not only experienced a loss on its underwriting business of $304 million but even worse realized $914 million in losses in its investment portfolio compared to a $67,000 realized gain in the first quarter of 2007.

Other mortgage guaranty and financial guaranty insurers on the list of 20 greatest profit decliners include Radian Guaranty Inc. and Radian Insurance Inc., both units of

Radian Group

(RDN) - Get Radian Group Inc. Report

; PMI Mortgage Insurance Company, a unit of

PMI Group


; and United Guaranty Residential Insurance Company, a unit of

American International Group

(AIG) - Get American International Group, Inc. Report


CIFG Assurance North American Inc. is the lowest rated insurer on the list, at D-. It is a small unit of the financial guaranty group CIFG Holding Ltd., which is ultimately owned by two French banks.

The highest-rated company on the list is United Services Automobile Association, or USAA, with an A+ rating. This is an insurer that sells exclusively to military personnel and their families. The company has a history of very strong earnings growth, excellent risk-adjusted capital, and good reserve adequacy.

Allstate Insurance Company, a unit of


(ALL) - Get Allstate Corporation Report

, and

State Farm Mutual Auto Insurance Company

round out the top five with the largest decline in profits. Both are highly rated and expected to weather the soft market well.

Growth in capital and surplus has been strong but slowing for the past three years, but remained in double digits until this year when first-quarter growth was down to just 4.2% -- the smallest growth since first-quarter 2003. Capital and surplus grew $26 billion, to $651.1 billion at the end of the first quarter 2008 from $625.1 billion at the same time last year.

Total assets declined for the first time since 2001, down 1.3% to $1.6 trillion. Contributing to this decline was a slow down in the growth of invested assets -- primarily made up of bonds and common stock -- to 3.6%. The industry's invested assets were $1.42 trillion at March 31, 2008 compared to $1.37 trillion a year ago.

MetLife Insurance Company of Connecticut, a unit of


(MET) - Get MetLife, Inc. Report

, alone accounted for $67.2 billion of the total industry's decline in assets. But this was simply an accounting change whereby MetLife is now accounting for those assets in its life insurance division.

Financial strength ratings for all U.S. property and casualty insurers are available at no charge on the

Insurers Ratings Screener


Melissa Gannon is director of insurance and bank ratings for Ratings, formerly Weiss Ratings, where she directs the operations of the company's insurance and bank ratings division.

In keeping with TSC?s Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Gannon cannot provide investment advice or recommendations, she appreciates your feedback;

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