Analysis of Current Insurance Industry Trends

P&C Industry Trends

The Property & Casualty insurance industry soft market cycle intensified in the fourth quarter 2007 as net premiums written fell by 6.6% compared with a 0.5% decline for the full year. Personal lines declined by a lesser rate (0.3%) in 2007 than commercial lines (1.0%). Profitability, while continuing at record levels, fell slightly in 2007 with a combined ratio of 95.1% for the total industry versus 91.6% in the prior year. The industry experienced its first underwriting loss in the fourth quarter 2007 (101.4%) since the fourth quarter of 2005 at least partially as a result of the continued upward pressure caused by finance and mortgage guarantee losses.

Industry operating leverage continues to decline to historically low levels, 0.85 at year end 2007 due to declines in net premiums written and year-over-year increases in policyholders’ surplus (PHS) of 7.3% for the full-year. Companies distributed significantly more capital to stockholders during 2007 than the prior year at 26% of capital and surplus. That said, PHS declined by 3.5% in the fourth quarter 2007 largely as a result of the significant unrealized capital losses outlined below.

Unrealized capital losses totaled $7.5 billion in the fourth quarter 2007 versus gains of $7.5 billion in the prior years’ period. These losses were somewhat offset by significant realized gains. Investment yields declined slightly in 2007 from 4.73% to 4.37% as investment income declined by 0.7% year-over-year.

Loss development continued to trend positively in 2007, reducing the combined ratio by 1.9% points for the full year. Workers’ compensation reserves continue to demonstrate a complete reversal from earlier this decade with reserve releases totaling 2.7% of net premiums earned.

Despite the recent release of industry loss reserves, there is still concern that the industry may be under-reserving asbestos and environmental reserves. The chart below displays industry asbestos and environmental incurred development. Asbestos losses increased every year since 2001 for a seven-year total of $28.1 billion, including a $14.0 billion increase in calendar years 2002 and 2003. While Environmental claims have only developed $2.7 billion in that same seven-year period, Environmental claims are considered to be much less developed than asbestos claims. It’s possible that a similar charge to environmental claims could occur as payments and pressure from regulators increase.

Life Industry Trends

Life insurance sector assets fell by 0.6% in the fourth quarter but grew at a 5.6% rate for the full-year 2007. This was only marginally less than the five-year CAGR of 5.7%. Unrealized capital losses totaled $4.8 billion in the fourth quarter and $2.5 billion for the full-year 2007 after experiencing gains in three of the last five years.

Premiums increased at a 5.8% rate versus a CAGR since 2002 of 5.1%. Leading this growth continues to be the sales of variable annuity products (16.8%) while fixed annuities sales continues to decline (1.3%).

The Life industry’s total operating profits (before tax and realized capital gains) grew by 5.4% to $44.7 billion in 2007. The Accident & Health line of business continues to lead other lines of business in operating profits with an increase of 22% year-over-year and a 9.3% profit margin.

Managed Care Industry Trendsⁱ

Managed care membership grew by over four million with non-commercial membership contributing 2.3 million members to the increase and commercial 2.2 million.

The increase in membership, combined with premium increases, contributed to an 8.3% growth in net premiums written for the year. The industry medical cost and claims expense ratio rose slightly to 88.8% from 88.0%. Underwriting gains decreased by 15% to $10 billion for the year. A 4.7% increase in net investment income and doubling of net realized capital gains helped to offset some of the decline in underwriting profitability.

Each major line of business reported growth in net premiums written during 2007 with Medicaid and Medicare reporting the fastest growth at 19% combined.

ⁱWhere available, prior periods include data for managed care entities that previously filed a Life or P&C statement. Some figures, such as membership, are not reported in these statements.

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