The property/casualty industry returned to profitability despite continuing declines in both written premiums and earned premiums. Net written premiums dropped $1.4 billion, or 1.3 percent, to $105.1 billion for the three months ending March 31, 2010, from $106.5 billion for the three months ending March 31, 2009. Net earned premiums declined $2.8 billion, or 2.7 percent, to $102.8 billion for first-quarter 2010 from $105.6 billion for first-quarter 2009, according to ISO and the Property Casualty Insurers Association of America (PCI).
Powering the increases in the property/casualty industry’s net income and overall rate of return, insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — more than tripled, rising $8.8 billion to $12.6 billion through three-months 2010 from $3.7 billion through three-months 2009.
Also contributing to the turnaround in insurers’ overall results, underwriting results improved in first-quarter 2010 even though premiums continued declining. Net losses on underwriting fell by $0.8 billion, or 29.6 percent, to $1.8 billion through March 31, 2010, from $2.6 billion through March 31, 2009, as loss and loss adjustment expenses (LLAE) dropped $4.3 billion to $74.5 billion from $78.8 billion.
Reflecting the decline in LLAE, the combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 101.1 percent for first-quarter 2010 from 102.2 percent for first-quarter 2009.
Policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — rose $29.2 billion, or 5.7 percent, to $540.7 billion at March 31, 2010, from $511.5 billion at year-end 2009, as a result of the $8.9 billion in net income for first-quarter 2010 and a record $22.7 billion in new funds paid in (new capital raised by insurers).
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.
“This is further proof that home, auto, and business insurers are fiscally sound, that we have been strong and stable throughout the economic downturn of the last two years, and that we are able to pay claims to policyholders during their times of need,” said David Sampson, PCI’s president and CEO. “With experts forecasting an active hurricane season, the $102.9 billion increase in policyholders’ surplus from $437.8 billion at the end of first-quarter 2009 to $540.7 billion at the end of first-quarter 2010 provides us all with an extra measure of confidence that insurers will be able to fulfill their obligations to policyholders when the wind blows. Nonetheless, it only takes one storm like Hurricane Ike in 2008, Hurricane Katrina in 2005, or Hurricane Andrew in 1992 to disrupt millions of lives and cause tens of billions of dollars in property damage. And this means now is the time for all of us — insurers, businesses, public safety officials, elected leaders, and the general public — to prepare for hurricane season to minimize the human hardship and economic loss in the event of a natural catastrophe this year.”
“With the property/casualty industry not being hit as hard by the recession and financial crisis as some other sectors of the economy, and with the property/casualty industry recovering so quickly, it’s easy to overlook the ongoing challenges facing insurers,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “Written premiums have declined for an unprecedented 12 consecutive quarters, and the industry’s 6.7 percent annualized rate of return for first-quarter 2010 was 3.5 percentage points less than the 10.3 percent average annualized first-quarter rate of return based on data extending back to 1986. Moreover, because of today’s low investment returns and the same long-term decline in investment leverage that helped insulate insurers from the financial crisis, insurers must now achieve better underwriting results just to be as profitable as they once were. For example, in first-quarter 1996, insurers achieved a 12.4 percent annualized rate of return with a combined ratio of 106.7 percent. Insurers’ annualized rate of return for first-quarter 2010 was 5.7 percentage points lower even though the combined ratio was 5.6 percentage points better.”
The property/casualty industry’s 6.7 percent annualized rate of return for first-quarter 2010 is 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 for first-quarter 2010 was negative 65 percent, up from negative 128.8 percent for first-quarter 2009. Other property/casualty insurers’ annualized rate of return for first-quarter 2010 was 8.3 percent, up from 2.1 percent a year earlier.
Underwriting Results
Written premium growth turned negative in second-quarter 2007 and has remained so ever since. Quarterly data on written premium growth extending back to 1987 indicates that net written premiums rose every quarter from first-quarter 1987 to first-quarter 2007 with just two exceptions — third-quarter 2005, when net written premiums declined 4.8 percent, and fourth-quarter 1991, when written premiums declined 0.1 percent. And the decline in third-quarter 2005 was attributable to a special transaction in which an insurer ceded $6 billion in premiums and the same amount of loss and loss adjustment expenses to its foreign parent.
“The 1.3 percent decline in net written premiums in first-quarter 2010 reflects the ongoing consequences of a once-in-a-generation economic storm. In first-quarter 2010, seasonally adjusted total private-sector employment fell 2.7 percent compared with its level a year earlier, private-sector wages and salaries dropped 1.4 percent, and the average unemployment rate rose to 9.7 percent from 8.2 percent in first-quarter 2009,” said Sampson. “This challenging economic environment reduces demand for insurance. Nonetheless, our industry remains stable and is financially well positioned.”
But insurers’ loss and loss adjustment expenses (LLAE) fell faster than premiums in first-quarter 2010, leading to improvement in overall underwriting results. Overall net LLAE (after reinsurance recoveries) fell 5.4 percent to $74.5 billion in the first three months of this year from $78.8 billion in the first three months of 2009.
About a fifth of the decline in net LLAE is attributable to a drop in the LLAE caused by catastrophes that struck the United States. ISO estimates that private insurers’ net LLAE from such catastrophes fell to $2.7 billion in 2010 from $3.5 billion in 2009, with net catastrophe LLAE for first-quarter 2009 including some late-emerging losses from Hurricane Ike in 2008.
According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in first-quarter 2010 caused $2.6 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers). Direct insured catastrophe losses dropped $0.7 billion in first-quarter 2010 from $3.3 billion in first-quarter 2009. But the $2.6 billion in direct insured catastrophe losses in first-quarter 2010 was $0.8 billion more than the $1.8 billion average for first-quarter direct catastrophe losses during the past ten years.
Excluding catastrophe-related LLAE, net LLAE fell $3.4 billion, or 4.5 percent, to $71.9 billion for first-quarter 2010 from $75.2 billion for first-quarter 2009. Downward revisions to the estimated ultimate cost of claims incurred in prior periods and consequent releases of LLAE reserves more than account for the $3.4 billion decline. Releases of LLAE reserves for claims not associated with catastrophes increased $4.1 billion to $5.6 billion in first-quarter 2010 from $1.5 billion in first-quarter 2009.
Partially offsetting the decline in LLAE, other underwriting expenses — primarily acquisition expenses; expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — rose $0.5 billion, or 1.7 percent, to $29.6 billion in first-quarter 2010 from $29.1 billion in first-quarter 2009. And dividends to policyholders increased $0.2 billion to $0.5 billion in the first three months of 2010 from $0.3 billion in the first three months of 2009.
The $1.8 billion net loss on underwriting for first-quarter 2010 amounted to 1.8 percent of the $102.8 billion in net premiums earned during the period, whereas the $2.6 billion net loss on underwriting for first-quarter 2009 amounted to 2.4 percent of the $105.6 billion in net premiums earned during that period.
“Mortgage and financial guaranty insurers continued to suffer disproportionate losses on underwriting consequent to the recession, foreclosures, and defaults on securities. But their underwriting results improved significantly,” said Murray. “Mortgage and financial guaranty insurers’ net written premiums declined 24.8 percent to $1.3 billion for first-quarter 2010. But their loss and loss adjustment expenses fell 40.8 percent to $3.4 billion, and their combined ratio improved to 232.1 percent for first-quarter 2010 from 291.4 percent for first-quarter 2009. Excluding mortgage and financial guaranty insurers, industry net written premiums fell 1 percent, loss and loss adjustment expenses dropped 2.7 percent, and the combined ratio rose to 99 percent for first-quarter 2010 from 98.5 percent a year earlier as a result of increases in underwriting expenses and dividends to policyholders.”
Investment Results
Insurers’ net investment income — primarily dividends from stocks and interest on bonds — dropped $0.1 billion, or 1 percent, to $11.6 billion in first-quarter 2010 from $11.7 billion in first-quarter 2009. But insurers posted $1 billion in realized capital gains on investments in first-quarter 2010 — a $9 billion swing from insurers’ $8 billion in realized capital losses on investments in first-quarter 2009. Combining net investment income and realized capital gains, overall net investment gains rose $8.8 billion, or 237.7 percent, to $12.6 billion for the first three months of this year from $3.7 billion for the first three months of 2009.
Combining the $1 billion in realized capital gains in first-quarter 2010 with $4.8 billion in unrealized capital gains during the period, insurers posted $5.8 billion in overall capital gains for the first three months of 2010 — a $30.5 billion swing from the $24.7 billion in overall capital losses on investments for the first three months of 2009.
“The property/casualty industry performed well throughout the Great Recession due to key factors that set the industry apart, such as pursuing a conservative investment strategy. Fundamentally, two things determine insurers’ investment income — one being the amount of cash and invested assets held by insurers and the other being the yield on those holdings,” said Sampson. “Insurers’ investment income dropped 1 percent in first-quarter 2010 because the annualized yield on insurers’ cash and invested assets fell to 3.7 percent during first-quarter 2010 from 4 percent in first-quarter 2009. Insurers’ average holdings of cash and invested assets rose to $1.3 trillion in first-quarter 2010 from $1.2 trillion in first-quarter 2009.”
“Insurers’ overall capital gains for first-quarter 2010 reflect developments in financial markets, with the S&P 500 rising 4.9 percent from the end of 2009 to the end of first-quarter 2010 and other major stock indexes rising by similar amounts,” said Murray. “Providing yet another indication that the worst ravages of the recession and financial crisis are behind us, insurers’ realized capital losses on impaired investments dropped to $1.1 billion in first-quarter 2010 from $7.8 billion in first-quarter 2009.”
Pretax Operating Income
Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — rose 7.4 percent to $10.2 billion for first-quarter 2010 from $9.5 billion for first-quarter 2009. The $0.7 billion increase in operating income was the net result of the $0.8 billion decline in net losses on underwriting and the $0.1 billion decline in net investment income. At $0.4 billion in first-quarter 2010, miscellaneous other income was essentially unchanged from its level a year earlier.
Mortgage and financial guaranty insurers’ operating income rose to negative $1.4 billion in first-quarter 2010 from negative $3.2 billion in first-quarter 2009. Excluding mortgage and financial guaranty insurers, the insurance industry’s operating income fell 8.7 percent to $11.6 billion for the first quarter of 2010 from $12.7 billion for the first quarter of 2009.
Net Income after Taxes
Combining operating income, realized capital gains (losses), and federal and foreign income taxes, the insurance industry’s net income after taxes for first-quarter 2010 totaled $8.9 billion — up from negative $1.3 billion in first-quarter 2009. The $10.2 billion increase in net income was the net result of the $0.7 billion increase in operating income, the $9 billion swing to $1 billion in realized capital gains from $8 billion in realized capital losses, and a $0.5 billion decrease in federal and foreign income taxes to $2.3 billion in first-quarter 2010 from $2.8 billion a year earlier.
Mortgage and financial guaranty insurers’ net income after taxes rose to negative $1.8 billion for first-quarter 2010 from negative $3.7 billion for first-quarter 2009. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes increased $8.4 billion to $10.7 billion for the three months ending March 31, 2010, from $2.3 billion for the three months ending March 31, 2009.
Policyholders’ Surplus
Policyholders’ surplus increased $29.2 billion to $540.7 billion at the end of first-quarter 2010 from $511.5 billion at the end of 2009. Additions to surplus in first-quarter 2010 included insurers’ $8.9 billion in net income after taxes, $4.8 billion in unrealized capital gains on investments (not included in income), and a record $22.7 billion in new funds paid in. Those additions were partially offset by $6.1 billion in dividends to shareholders and $1 billion in miscellaneous other charges against surplus.
The $22.7 billion in new funds paid in during first-quarter 2010 is up from $1 billion in first-quarter 2009 and is the largest amount for any quarter since the start of ISO’s quarterly data in 1986. The previous quarterly record high for new funds paid in was $12.6 billion in fourth-quarter 2002, with the record-high $22.7 billion for first-quarter 2010 including $22.5 billion pumped into one insurer by its parent as the insurer absorbed a major acquisition outside the insurance space.
The $4.8 billion in unrealized capital gains on investments in first-quarter 2010 contrasts with insurers’ $16.7 billion in unrealized capital losses in first-quarter 2009.
The $6.1 billion in dividends to shareholders for first-quarter 2010 was nearly three times the $2.1 billion in dividends to shareholders in first-quarter 2009, potentially signaling that insurers’ concerns about the effects of the financial crisis on access to capital and liquidity had abated. Nonetheless, at $6.1 billion, dividends to shareholders in first-quarter 2009 were $0.2 billion less than dividends to shareholders in first-quarter 2008.
The $1 billion in miscellaneous charges against surplus in first-quarter 2010 was up from $0.4 billion in first-quarter 2009.