P/C Insurers’ Profits and Profitability Rose in First-Quarter 2012, Propelled by Improvement in Underwriting Results

Driving the increases in insurers’ net income and overall rate of return, net losses on underwriting receded to $0.2 billion in first-quarter 2012 from $4.5 billion in first-quarter 2011. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 99 percent in first-quarter 2012 from 103.3 percent in first-quarter 2011, according to ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).

The improvement in underwriting results is primarily attributable to a drop in net losses and loss adjustment expenses (LLAE) from catastrophes. ISO estimates that insurers’ net LLAE from catastrophes fell to $3.4 billion in first-quarter 2012 from $6.6 billion in first-quarter 2011. Those amounts exclude LLAE that emerged after insurers closed their books for each period but do include late-emerging LLAE from events in prior periods.

Partially offsetting the improvement in underwriting results, net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — dropped $1.2 billion to $12.3 billion in first-quarter 2012 from $13.6 billion in first-quarter 2011. Also limiting the improvement in insurers’ overall results, insurers’ miscellaneous other income receded to $0.4 billion in first-quarter 2012 from $0.5 billion in first-quarter 2011, and insurers’ federal and foreign income taxes rose to $2.3 billion from $1.8 billion.

Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — grew to $11.8 billion in first-quarter 2012 from $8.6 billion in first-quarter 2011.

Reflecting insurers’ net income after taxes and unrealized capital gains on investments (not included in net income), policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — increased $20.4 billion to a record-high $570.7 billion at March 31, 2012, from $550.3 billion at December 31, 2011.

The 7.2 percent annualized rate of return for first-quarter 2012 is insurers’ highest first-quarter annualized rate of return since the 13.3 percent for first-quarter 2007. Since the start of ISO’s quarterly data in 1986, insurers’ first-quarter annualized rate of return has ranged from as low as negative 2.6 percent in 1994 to as high as 17.9 percent in 2005 and has averaged 10 percent.

The figures are consolidated estimates for all private property/casualty insurers based on reports accounting for at least 96 percent of all business written by private U.S. property/casualty insurers.

“The insurance industry’s record-high $570.7 billion in policyholders’ surplus as of March 31 is a testament to the resilience of property/casualty insurers throughout the financial crisis and the strength and safety of our commitment to policyholders,” said Robert Gordon, PCI’s senior vice president for policy development and research. “The $20.4 billion increase in policyholders’ surplus in first-quarter 2012 underscores that insurers are strong, well capitalized, and well prepared to pay future claims. Policyholders and regulators can rely on the insurance industry to fulfill its obligations when catastrophes strike, even if the economy remains difficult.”

“The 99 percent combined ratio for first-quarter 2012 is the best first-quarter underwriting result since the 91.6 percent combined ratio for first-quarter 2007. The improvement in underwriting results is especially welcome given the toll that long-term declines in interest rates and investment leverage have taken on insurers’ ability to use investment earnings to balance underwriting losses,” said Michael R. Murray, assistant vice president for financial analysis at ISO. “Based on daily data since the start of 1962, the yield on ten-year Treasury notes fell from a record-high 15.84 percent on September 30, 1981, to a record-low 1.47 percent on June 1, 2012, and has changed little since. Reflecting the high interest rates of the 1980s and insurers’ investment leverage at the time, insurers’ overall rate of return during the decade averaged 10.3 percent, even though the combined ratio averaged 109.3 percent. Because of today’s interest rates and investment leverage, insurers’ 7.2 percent annualized overall rate of return for first-quarter 2012 was a full 3 percentage points less than their average rate of return during the 1980s, even though the 99 percent combined ratio for first-quarter 2012 was more than 10 percentage points better than the average combined ratio during the 1980s.”

The property/casualty industry’s 7.2 percent annualized rate of return for first-quarter 2012 was the net result of negative rates of return for mortgage and financial guaranty insurers and single-digit rates of return for other insurers. ISO estimates that mortgage and financial guaranty insurers’ annualized rate of return on average surplus deteriorated to negative 38.1 percent in first-quarter 2012 from negative 17.7 percent in first-quarter 2011. Excluding mortgage and financial guaranty insurers, the industry’s annualized rate of return climbed to 8.2 percent in first-quarter 2012 from 6.1 percent in first-quarter 2011.

Underwriting Results

According to the release, net losses on underwriting shrank by $4.3 billion to $0.2 billion from $4.5 billion for the same quarter last year, as premiums rose and losses and loss adjustment expenses (LLAE) declined. Net written premiums increased by $3.3 billion, or 3.1 percent, to $112.4 billion for the quarter, from $109 billion in Q1 2011, as net earned premiums rose by $2.7 billion, or 2.6 percent, to $107.9 billion from $105.2 billion.

Growth in overall net written premiums slowed to 3.1 percent in first-quarter 2012 from 3.5 percent in first-quarter 2011, Murray said. Premium growth also slowed compared with the growth rates for the last two quarters of 2011, receding to 3.1 percent in first-quarter 2012 from 3.8 percent in fourth-quarter 2011 and 4.1 percent in third-quarter 2011. But growth didn't slow for all sectors of the insurance industry.

Net LLAE (after reinsurance recoveries) dropped $3.1 billion, or 4 percent, to $75.6 billion in first-quarter 2012 from $78.7 billion in first-quarter 2011.
The drop in net LLAE from catastrophes accounts for the bulk of the improvement in underwriting results in first-quarter 2012, Gordon said. If net LLAE from catastrophes remained at the same level experienced in first-quarter 2011, the combined ratio would have improved by only 1.3 percentage points to 102 percent instead of improving by 4.2 percentage points.

Investment Results

According to the release, insurers net investment income fell 7.5 percent to $11.7 billion from $12.6 billion in first-quarter 2011. Realized capital gains on investments declined $0.3 billion to $0.7 billion from $1 billion a year earlier. Combining net investment income and realized capital gains, net investment gains dropped $1.2 billion, or 9.2 percent, to $12.3 billion for Q1 2012, from $13.6 billion for the same quarter last year.

The decline in insurers investment income reflects declines in market yields, with the annualized yield on insurers investments falling to 3.6 percent in first-quarter 2012 from 3.9 percent in first-quarter 2011, as the average yield on 10-year U.S. Treasury notes dropped to 2 percent from 3.5 percent, Murray said. Insurers average holdings of cash and invested assets the assets on which insurers earn investment income actually rose 0.2 percent in first-quarter 2012 compared with their level a year earlier.

Pretax Operating Income

According to the release, Q1 2012 pretax operating income climbed by $3.2 billion, or 36.6 percent, to $11.8 billion from $8.6 billion for first-quarter 2011; the increase was the net result of the $4.3 billion decline in net losses on underwriting, the $0.9 billion drop in net investment income, and the $0.2 billion decrease in miscellaneous other income. Mortgage and financial guaranty insurers operating income deteriorated to negative $1.2 billion for the quarter from negative $0.7 billion in the same quarter last year. Excluding mortgage and financial guaranty insurers, the insurance industry's operating income climbed $3.6 billion, or 38.6 percent, to $13 billion for the quarter, from $9.4 billion in Q1 2011.

Net Income after Taxes

According to the release, net income after taxes for the quarter were $10.1 billion, an increase of $2.3 billion, or 29.6 percent, from $7.8 billion for Q1 2011. The increase was the net result of the $3.2 billion increase in operating income, the $0.3 billion decrease in realized capital gains and the $0.5 billion increase in federal and foreign income taxes.

Mortgage and financial guaranty insurers net income after taxes fell to negative $1.1 billion for first-quarter 2012 from negative $0.5 billion for first-quarter 2011. Excluding mortgage and financial guaranty insurers, the insurance industry's net income after taxes rose $2.8 billion to $11.2 billion for first-quarter 2012 from $8.4 billion for first-quarter 2011.

Policyholders Surplus

According to the release, policyholders surplus climbed $20.4 billion, or 3.7 percent, to $570.7 billion as of March 31, 2012, from $550.3 billion at year-end 2011. Additions to surplus in first-quarter 2012 included insurers $10.1 billion in net income after taxes, $13.7 billion in unrealized capital gains on investments (not included in net income), $0.3 billion in new funds paid in, and $2.7 billion in miscellaneous other changes in surplus. Those additions were partially offset by $6.5 billion in dividends to shareholders.

Insurers $13.7 billion in unrealized capital gains on investments in first-quarter 2012 was more than three times insurers $3.9 billion in unrealized capital gains in first-quarter 2011. The $0.3 billion in new funds paid in during first-quarter 2012 was down from $1.5 billion in first-quarter 2011, according to the report.

The $2.7 billion in miscellaneous additions to surplus in first-quarter 2012 compares with $0.2 billion in miscellaneous charges against surplus in first-quarter 2011. Dividends to shareholders rose to $6.5 billion in first-quarter 2012 from $5.7 billion in first-quarter 2011, according to the report.
Mortgage and financial guaranty insurers surplus fell to $11.1 billion as of March 31, 2012, from $11.4 billion at year-end 2011. Excluding mortgage and financial guaranty insurers, industry surplus increased $20.7 billion to $559.6 billion as of March 31, 2012, from $538.9 billion as of Dec. 31, 2011, according to the report.