Insurance Company Earnings Plunge 53%

The nation's 3,000 property-and-casualty insurers, including MBIA and Allstate, suffered a combined 53% decline in profits during the first half of 2008, dragged down by the first industry-wide underwriting loss in five years.

Insurers' earnings dropped to $16 billion in the six months through June 30 from $35 billion in the same period a year earlier.

Losses in underwriting and investments delivered a double blow. The industry has been limping through a weak market for several quarters, and a rebound isn't expected for several more. First-half premium volume was down for the first time since 2005, decreasing to $220.5 billion from $221.3 billion because of depressed prices. Claims jumped by 13.6%, or $20 billion. Consequently, the industry booked a net loss on core underwriting of $5 billion, compared with a gain of $15.7 billion in the year-earlier period.

On top of the extraordinary first-half underwriting loss, invested assets of all P&C insurers declined 14% to $27 billion from $32 billion. The value of the industry's $845 billion bond holdings increased 0.2%, the smallest gain since a decline in 2000. Likewise, common stock holdings slumped 5.8% to $326 billion from $346 billion.

The table below includes the companies with the largest year-over-year net losses.

Click here for larger image.

Allstate, a division of Allstate Insurance Group ( ALL), reported a profit drop of $1.5 billion, more than any other insurer. The percentage decline was 61.5%. The lower earnings at the third-largest U.S. property-casualty insurer came equally from underwriting and investment losses. Other Allstate affiliates, Allstate Texas Lloyds and Allstate Fire and Casualty Insurance Co., are major homeowner insurers in Texas. Results for both insurers remained flat during the first half of the year, though claims stemming from Hurricane Ike probably will dent underwriting.

Standouts on the list are mortgage guaranty insurers, which sank with their underwriting businesses: MBIA, a division of Municipal Bond Investment Assurance ( MBI), Ambac ( ABK), PMI Mortgage Insurance Co., a unit of PMI ( PMI), Radian Guaranty Inc., a subsidiary of Radian ( RDN) and Triad Guaranty Insurance, which is part of Collateral Holdings.

Unlike other mortgage guaranty insurers, Ambac also suffered tremendous losses in its investment portfolio -- $1.1 billion.

Two State Farm subsidiaries also made the list -- State Farm Mutual Automobile Insurance and State Farm Fire and Casualty. They are the largest and the 11th-biggest P&C insurers in the country, respectively. Another State Farm affiliate, State Farm Lloyds, is not among the 20 companies with the greatest first-half losses. However, it lost $67 million during the period and is the largest homeowner insurer in Texas, so further losses can be expected for the remainder of 2008.

Industry capital declines

As a consequence of the across-the-board underwriting and investment losses, first-half industry capital and surplus declined for the first time in six years, dropping 1% to $638 billion from $644 billion.

National Indemnity, a division of Berkshire-Hathaway ( BRK), suffered the largest decline in capital, tumbling 8.7% to $33.1 billion from $36.3 billion. The company had a $3.5 billion decrease in unrealized capital gains and also booked an $862 million decline in underwriting profits and a $135 million reduction in net realized investment results.

Allstate had a $3 billion decline in capital. Other companies with $1 billion decreases were Cincinnati Insurance, a unit of Cincinnati Financial ( CINF), Westport Insurance, a division of Swiss Re, and XL Capital Assurance Inc., which is part of XL Capital ( XL).

With the continued decline in the securities market during the third quarter and expected deterioration for the foreseeable future as well as the soft market slump, losses in both the underwriting business and investment returns are expected to continue throughout the remainder of 2008, further hurting profits.

TheStreet.com Ratings issues financial strength ratings on each of the nation's 8,600 banks and savings and loans which are available at no charge on the Banks & Thrifts Screener. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.

Melissa Gannon is director of insurance and bank ratings for TheStreet.com 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 TheStreet.com 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.

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