P/C Insurers’ Profits Fell in Q1 as Underwriting Losses Grew

Private U.S. property/casualty insurers’ net income after taxes dropped to $7.8 billion in first-quarter 2011 from $8.9 billion in first-quarter 2010, with insurers’ annualized rate of return on average policyholders’ surplus decreasing to 5.6 percent from 6.8 percent.

Reflecting insurers’ $7.8 billion in net income after taxes, policyholders’ surplus rose $7.8 billion, or 1.4 percent, to a record $564.7 billion at March 31, 2011, from $556.9 billion at Dec. 31, 2010.

Driving the declines in insurers’ net income and overall rate of return, net losses on underwriting grew to $4.5 billion in first-quarter 2011 from $1.8 billion in first-quarter 2010. The combined ratio deteriorated to 103.3 percent in first-quarter 2011 from 101.1 percent in first-quarter 2010, according to ISO and the Property Casualty Insurers Association of America (PCI).

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.

While the declines in property/casualty insurers’ net income and return on surplus in first-quarter 2011 may be bad news for insurance companies, overall surplus rose to a record high, meaning insurers should have the financial resources necessary to cover claims even if this year’s hurricane season is as bad as the experts predict, said David Sampson, PCI’s president and CEO.

Combining insurers’ record $564.7 billion in policyholders’ surplus, their $560.8 billion in loss and loss adjustment expense reserves (LLAE), and their $202.7 billion in unearned premium reserves as of March 31, 2011, insurers had $1.3 trillion to pay claims and meet other contingencies.

“Nonetheless, the devastatingly deadly EF5 tornado that struck Joplin, Missouri, last month and other tragic events around the globe — such as the monstrous earthquake and tsunami that struck northeast Japan in March — should serve as vivid reminders that catastrophes can strike anywhere at any moment,” said Sampson.

With mounting net losses on underwriting driving the decline in insurers’ net income and overall profitability in first-quarter 2011, insurers continued to face substantial headwinds in their core business — underwriting.

“While there were some positive developments that bode well, there have also been some negative developments that suggest insurers’ results will get worse,” said Michael R. Murray, ISO’s assistant vice president for financial analysis.

On the plus side of the ledger, net written premiums rose for the fourth consecutive quarter, with net written premiums rising in first-quarter 2011 by the largest amount since third-quarter 2006.

On the negative side, Murray said, catastrophes striking the United States in second-quarter 2011 had already caused $14.7 billion in direct insured losses to property – more than double the $6.4 billion in direct insured losses from all the catastrophes that occurred in second-quarter 2010 – and second-quarter 2011 catastrophe losses are expected to rise further when losses from four recent events are added to the tally.

Underwriting Results

Net losses on underwriting grew to $4.5 billion in first-quarter 2011 from $1.8 billion in first-quarter 2010, a $2.7 billion increase, as growth LLAE and other underwriting expenses outpaced growth in premiums earned.

Net written premiums rose $3.7 billion, or 3.5 percent, to $108.6 billion for first-quarter 2011 from $104.9 billion for first-quarter 2010. Net earned premiums rose $2.1 billion, or 2 percent, to $104.8 billion from $102.7 billion.

Net LLAE (after reinsurance recoveries) rose $4 billion, or 5.4 percent, to $78.5 billion in first-quarter 2011 from $74.5 billion in first-quarter 2010.

Other underwriting expenses – primarily acquisition expenses; expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes – rose $0.8 billion, or 2.9 percent, to $30.4 billion in first-quarter 2011 from $29.5 billion in first-quarter 2010.

Overall LLAE increased despite a decline in LLAE from catastrophes striking the United States. ISO estimates that private insurers’ net LLAE from such catastrophes fell $0.7 billion to $2 billion in first-quarter 2011 from $2.7 billion in first-quarter 2010.

The 3.5 percent increase in total industry net written premiums in first-quarter 2011 was the first increase in first-quarter net written premiums since 2007 and the largest since 2004, when first-quarter net written premiums rose 4.8 percent. “Moreover — and possibly sending a signal about the nature of things to come – year-to-year comparisons improved for each of the three major subsectors of the industry tracked by ISO,” said Murray.

Net written premium growth for insurers writing predominantly personal lines accelerated to 3.8 percent in first-quarter 2011 from 2.2 percent in first-quarter 2010, with premium growth for insurers writing more balanced books of business increasing to 3.1 percent from negative 1.4 percent. Premium growth for insurers writing predominantly commercial lines rose to 3.5 percent from negative 5.3 percent, though first-quarter 2011 net written premiums for insurers writing predominantly commercial lines may have benefited from premiums paid by foreign insurers to reinstate reinsurance coverage.

“The deterioration in underwriting profitability as measured by the combined ratio is a particular cause for concern, because today’s low investment yields, together with the long-term decline in investment leverage that helped insulate insurers from the ravages of the financial crisis and the Great Recession, mean insurers need better underwriting results just to be as profitable as they once were,” said Sampson.

Insurers’ annualized rate of return for first-quarter 2011 fell short of insurers’ annualized first-quarter rate of return for 10 of the 11 years from 1986 to 1996, even though insurers’ combined ratio for first-quarter 2011 was better than their combined ratio for the first quarter of each of those 11 years. As a result, insurers’ 5.6 percent annualized rate of return for first-quarter 2011 was 4.8 percentage points lower than their 10.3 percent average annualized first-quarter rate of return for 1986 to 1996, while insurers’ 103.3 percent combined ratio for first-quarter of 2011 was 4.3 percentage points better than their 107.6 percent average first-quarter combined ratio for 1986 to 1996.

The $4.5 billion in net losses on underwriting in first-quarter 2011 amounted to 4.3 percent of the $104.8 billion in net premiums earned during the period, whereas the $1.8 billion in net losses on underwriting in first-quarter 2010 amounted to 1.7 percent of the $102.7 billion in net premiums earned during that period.

Topics Trends Catastrophe Carriers USA Profit Loss Excess Surplus Underwriting Property Property Casualty Casualty