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P/C Insurers' Profits and Profitability Tumbled in First-Half 2011, But Still Remain Financially Strong

Source: ISO

Posted on 11 Oct 2011

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Private U.S. property/casualty insurers’ net income after taxes fell to $4.8 billion in first-half 2011 from $16.8 billion in first-half 2010, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus decreasing to 1.7 percent from 6.4 percent.

Driving the declines in insurers’ net income and overall rate of return, net losses on underwriting grew to $24.1 billion in first-half 2011 from $5.1 billion in first-half 2010. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 110.5 percent for first-half 2011 from 101.7 percent for first-half 2010, according to ISO and the Property Casualty Insurers Association of America (PCI).

The deterioration in underwriting results is largely attributable to a spike in net losses and loss adjustment expenses (LLAE) from catastrophes. ISO estimates that insurers’ net LLAE from catastrophes in first-half 2011 totaled $23.9 billion, up from $8 billion in first-half 2010. These 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 deterioration in underwriting results, net investment gains — the sum of net investment income and net realized capital gains (or losses) on investments — grew $2.4 billion to $28.4 billion in first-half 2011 from $26 billion in first-half 2010.

Insurers’ miscellaneous other income fell $0.1 billion to $0.6 billion in first-half 2011 from $0.7 billion in first-half 2010, and their federal and foreign income taxes dropped $4.7 billion to $0.1 billion from $4.8 billion.

Policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — fell $0.2 billion to $559.1 billion at June 30, 2011, from $559.2 billion at year-end 2010.

Insurers’ 1.7 percent annualized rate of return on average surplus for first-half 2011 was the lowest for any first half since the start of ISO’s quarterly records in 1986 and 7.7 percentage points less than the 9.4 percent average first-half rate of return for the 25 years from 1986 to 2010.

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.

“Despite record-setting catastrophe losses from events like the deadly EF 5 tornado that struck Joplin, Missouri, last May, insurers emerged from first-half 2011 financially sound and well able to continue providing essential financial protection to consumers and businesses alike — a quiet but important testament to insurers’ enterprise risk management and the effectiveness of state solvency regulation,” said David Sampson, PCI’s president and CEO. “As of June 30, 2011, insurers had $559.1 billion in policyholders’ surplus to cover new claims and meet other contingencies — more than 150 times all direct insured losses to U.S. property from Hurricane Irene. The industry is strong, well-capitalized, and capable of paying claims.”

“The 110.5 percent combined ratio for first-half 2011 is the worst six-month underwriting result since the 111.1 percent combined ratio for first-half 2001. Even after adjusting for record catastrophe losses, the latest data indicates that insurers continued to face strong headwinds in their core business — underwriting,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “ISO estimates that insurers’ combined ratio would have risen 1.3 percentage points to 103 percent in first-half 2011 if net LLAE from catastrophes had remained the same as they were in first-half 2010. The deterioration in adjusted underwriting results is a particular cause for concern, because today’s low interest rates severely limit insurers’ ability to generate incremental investment income.”

The property/casualty industry’s 1.7 percent annualized rate of return for first-half 2011 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 improved to negative 26.1 percent for first-half 2011 from negative 43.6 percent for first-half 2010. Excluding mortgage and financial guaranty insurers, the industry’s annualized rate of return fell to 2.3 percent in first-half 2011 from 7.6 percent in first-half 2010.