Based on SNL's statutory data for nearly 88% of expected individual P&C entities and excluding companies classified by SNL to have a commercial financial lines focus, the industry is on pace to record underwriting profits in excess of $535 million and a combined ratio of approximately 99.1%. Those same companies posted a $7.72 billion underwriting loss in the third quarter of 2008. While the expense ratio, defined in this case as underwriting expenses divided by net premiums written, ticked slightly higher, the loss ratio fell nearly 9 percentage points to 71.7%.
The aforementioned collection of companies amassed after-tax realized capital gains of $458.8 million, a welcome respite from four consecutive quarters of realized capital losses that exceeded $19.4 billion in the aggregate. Contingent upon the outcome of any group-level refinements, the combination of net investment income earned, net underwriting profits and net realized capital gains is likely to result in the highest aggregate level of net income among the companies for which third-quarter data is available since the first quarter of 2008.
While not contributing to income, the net unrealized capital gain and/or loss position for the group of companies improved for a second consecutive quarter by more than $14 billion. The change in capital gain and/or loss positions does, however, factor into surplus calculations, providing another boost beyond that which will be provided by way of earnings. To that end, the companies are poised to experience an increase of nearly 5% in policyholders' surplus on a quarter-over-quarter basis, again subject to further group-level refinements. That, too, is a welcome development for an industry that saw surplus erosion for three straight quarters through March 31.
At the same time, premium growth trends provided reason for pause. Net premiums written for the industry, again excluding companies with a commercial financial lines focus, dropped 5.6% in the third quarter and are down 3% year-to-date. With industry commentary on the rate outlook trending more pessimistic in recent months, it would seem companies will continue to be pressured in future periods to offset weak revenues with favorable underwriting and investment results.
The inclusion of financial and mortgage guarantors in the P&C universe has served to create material distortion and volatility in the quarterly data throughout the global financial crisis. The exclusion of those companies, virtually all of which have an SNL-assigned commercial financial lines business focus, has yielded very different results from what would otherwise serve as the industry aggregates in recent periods. The third quarter was no different.
Companies with a commercial financial lines focus are poised to absorb more than $1 billion in underwriting losses for the seventh time out of the previous eight quarters, a result that in and of itself swings the P&C industry from an underwriting profit to a loss in the third quarter. The combined underwriting loss among those companies for which data is available for the quarter ended Sept. 30 amounts to $837.5 million, resulting in a combined ratio of 100.7%, down from a $12.3 billion underwriting loss for the year-earlier period. The industry, when including the guarantors, combined to generate after-tax realized capital gains of $635.9 million, compared to realized capital losses of $6.26 billion in the same period in 2008.
A total of 18 P&C insurance companies for which third-quarter data is available reported losses in excess of $100 million for the period. Seven are classified as commercial financial lines companies: MBIA Inc. unit MBIA Insurance Corp., Genworth Financial Inc. unit Genworth Mortgage Insurance Corp., MGIC Investment Corp. unit MGIC Reinsurance Corp. of Wisconsin, PMI Group Inc. unit PMI Mortgage Insurance Co., Radian Group Inc. unit Radian Guaranty Inc., MGIC Investment's Mortgage Guaranty Insurance Corp., and Triad Guaranty Inc.'s Triad Guaranty Insurance Corp.
With the guaranty insurers continuing to produce red ink on a regular basis, where are the offsetting gains coming from in the P&C industry?
It clearly was not from the personal lines arena. Companies classified by SNL to have a personal lines focus combined to generate a third-quarter underwriting loss of $385.6 million, based on available data. Personal lines companies have combined to generate in excess of $10 billion in underwriting losses between the second quarter of 2008 and the third quarter of 2009, again limited to those companies for which third-quarter financial results are available.
State Farm Mutual Automobile Insurance Co., State Farm Fire and Casualty Co., State Farm Florida Insurance Co. and State Farm Indemnity Co. combined to produce an underwriting loss of nearly $1.3 billion, but the Bloomington, Ill.-based personal lines powerhouse was not alone in seeing red in the third quarter. Nationwide Mutual Insurance Co. reported an underwriting loss of $132.2 million, and American Family Mutual Insurance Co. posted a $251.1 million underwriting loss.
Conversely, companies with a commercial lines focus — excluding the commercial financial lines insurers and including companies classified by SNL to have a commercial lines, commercial property, general liability, medical malpractice or workers' compensation focus — continued their recent run of profitability with an underwriting gain of $841.6 million. That is down from underwriting gains in excess of $1 billion in each of the three prior quarters, but it marks considerable improvement from underwriting losses of $2.2 billion in the year-earlier period.
Underwriting profits for companies classified as having a commercial property focus exceeded of $1.2 billion in the third quarter. Medical malpractice writers generated underwriting gains of $131.1 million. General liability companies amassed an underwriting gain of just more than $86 million. Offsetting those results, companies with a general commercial lines focus produced an underwriting loss of nearly $527 million, and workers' compensation companies combined to generate an underwriting loss of $71.6 million.
Among individual commercial lines writers, Liberty Mutual Holding Co. Inc. unit Liberty Mutual Insurance Co. led a list of five commercial lines insurers to produce underwriting losses of more than $100 million. Liberty Mutual Insurance's underwriting loss for the period was $465 million. Five commercial lines companies posted underwriting gains in excess of $100 million, led by gains at Chubb Corp. unit Federal Insurance Co. and at Factory Mutual Insurance Co. of $274.9 million and $202.1 million, respectively.
Companies classified by SNL to have a reinsurance or large reinsurance focus turned in an underwriting profit of $217.6 million for the period, a number that would have been much more favorable were it not for a $192.5 million underwriting loss reported by Swiss Reinsurance Co. Ltd. unit Swiss Reinsurance America Corp.
Third-quarter financials for more than 3,800 individual P&C, life and health insurers are available on SNLi and SNLxl.