U.S. P&C insurers diversifying into life are most likely to see equity declines

U.S. property and casualty companies that diversified into life insurance have been hit hardest by US$55 billion in GAAP equity losses over the first nine months of 2008, according to a recent report by Fitch Ratings.
Fitch analyzed a “public company universe” of 52 companies in its recent ‘Nine-Month 2008 Results Review.’ Shareholders’ equity for 46 of the surveyed companies declined due to both realized and unrealized investment losses.
In aggregate, the group reported a US$55.7 billion (13%) decline in GAAP equity during the period (an 8.9% decline excluding American International Group (AIG) results).
“Of the subsectors in our universe, the diversified commercial insurers were hit hardest by realized and unrealized investment losses, which should not be surprising considering that several of these companies (e.g. AIG, Hartford Financial Services Group Inc. [Hartford]) have significant life insurance businesses,” Fitch noted in its report. Fitch added that these life insurance businesses “have considerably higher invested asset leverage and mortgage-related assets than traditional property/casualty businesses and are therefore more exposed to volatility in the equity and fixed-income markets.”
Fitch noted that earnings for the surveyed group were “not expected to rebound significantly in the remainder of 2008, as further investment losses are likely.”
Overall, the group had combined earned premium revenue of about US$208 billion during the first nine months of 2009, a 1% increase over the prior-year period in spite of decreasing prices.
But the group’s aggregate combined ratio of 97.7% was significantly worse than it was during the first nine months of 2007, when it was 87.7%.