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Catastrophes Erode P/C Insurers’ Results for 9 Months of 2011

December 27, 2011

Private U.S. property/casualty insurers’ net losses on underwriting grew to $34.9 billion in nine-months 2011 from $6.3 billion in nine-months 2010. The combined ratio deteriorated to 109.9 percent for nine-months 2011 from 101.2 percent for nine-months 2010, according to ISO and the Property Casualty Insurers Association of America (PCI).

Net income after taxes fell to $8 billion for the nine-months period, down from $27.1 billion in nine-months 2010, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus dropping to 1.9 percent from 6.8 percent.

According to the industry groups, 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 rose to $33.2 billion in nine-months 2011 from $10.8 billion in nine-months 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 grew $2.1 billion to $42 billion in nine-months 2011 from $39.8 billion in nine-months 2010.

Insurers’ miscellaneous other income rose $1.3 billion to $1.7 billion in nine-months 2011 from $0.4 billion in nine-months 2010, while federal and foreign income taxes dropped $6.1 billion to $0.8 billion from $6.9 billion.

Policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — fell $20.6 billion to $538.6 billion at September 30, 2011, from $559.2 billion at year-end 2010.

Insurers’ 1.9 percent annualized rate of return on average surplus for nine-months 2011 was the lowest nine-month rate of return since the 1.2 percent for nine-months 2008 and the third lowest nine-month rate of return since the start of ISO’s quarterly records in 1986. At 1.9 percent, insurers’ annualized rate of return for nine-months 2011 was 6.7 percentage points below the 8.6 percent average nine-month 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 massive net losses on underwriting, insurers emerged from nine-months 2011 strong, well-capitalized, and capable of paying future claims,” said Robert Gordon, PCI’s senior vice president for policy development and research.

Gordon said that as of Sept. 30, 2011, insurers had $538.6 billion in policyholders’ surplus to cover new claims and meet other contingencies — which he said is “125 times all the direct insured losses to U.S. property from Hurricane Irene.”

The 109.9 percent combined ratio for nine-months 2011 is the worst nine-month underwriting result since the 114.4 percent combined ratio for nine-months 2001. “Even after adjusting for catastrophe losses, the latest data indicates that insurers continued to face headwinds in their core business — underwriting,” said Michael R. Murray, ISO’s assistant vice president for financial analysis.

Insurers’ combined ratio would have risen 1.7 percentage points to 102.9 percent in nine-months 2011 if net LLAE from catastrophes had remained the same as they were in nine-months 2010, according to Murray.

“The deterioration in adjusted underwriting results is cause for concern, because today’s low interest rates severely limit insurers’ ability to generate incremental investment income,” Murray said. “The monthly average yield on ten-year Treasury notes fell to a record-low 1.98 percent in September 2011 based on data extending back to April 1953 — down from 2.65 percent in September 2010 and a record-high 15.32 percent in September 1981.”

The property/casualty industry’s 1.9 percent annualized rate of return for nine-months 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 deteriorated to negative 48.8 percent for nine-months 2011 from negative 35.7 percent for nine-months 2010. Excluding mortgage and financial guaranty insurers, the industry’s annualized rate of return fell to 3 percent in nine-months 2011 from 7.8 percent in nine-months 2010.

Underwriting Results

Net losses on underwriting grew $28.6 billion to $34.9 billion in nine-months 2011 from $6.3 billion in nine-months 2010, as growth in LLAE and other underwriting expenses outpaced growth in premiums earned.

Net written premiums rose $10.1 billion, or 3.1 percent, to $334.5 billion for nine-months 2011 from $324.5 billion for nine-months 2010. Net earned premiums rose $8.1 billion, or 2.6 percent, to $323.8 billion from $315.7 billion.

Net LLAE (after reinsurance recoveries) rose $33.6 billion, or 14.6 percent, to $264 billion in nine-months 2011 from $230.4 billion in nine-months 2010.

Other underwriting expenses — primarily acquisition expenses; expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — rose $3.1 billion, or 3.4 percent, to $93.6 billion in nine-months 2011 from $90.5 billion in nine-months 2010.

Dividends to policyholders totaled $1.1 billion in nine-months 2011, essentially unchanged from dividends to policyholders in nine-months 2010.

Though the increase in overall LLAE is primarily a result of losses from catastrophes, other losses also rose. ISO estimates that private insurers’ net LLAE from catastrophes jumped $22.4 billion to $33.2 billion in nine-months 2011 from $10.8 billion in nine-months 2010. Other net LLAE rose $11.2 billion, or 5.1 percent, to $230.8 billion through nine-months 2011 from $219.6 billion through nine-months 2010.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in nine-months 2011 caused $32.6 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual-market insurers and foreign insurers and reinsurers), up $21.6 billion compared with the direct insured losses caused by catastrophes striking the United States in nine-months 2010 and $13.9 billion more than the $18.6 billion average for nine-months direct catastrophe losses during the past ten years.

U.S. insurers’ $33.2 billion in net LLAE from catastrophes in nine-months 2011 included an estimated $29.1 billion in LLAE from catastrophes that struck the United States. Though estimating the LLAE from foreign catastrophes included in U.S. insurers’ financial results is difficult, the available information suggests that U.S. insurers’ net LLAE for nine-months 2011 included between $3 billion and $5 billion in LLAE from catastrophes striking elsewhere around the globe — events such as the earthquake and tsunami that struck northeastern Japan on March 11 and the earthquake that struck Christchurch, New Zealand, on February 22 (February 21 UTC).

Downward revisions to the estimated ultimate cost of claims incurred in prior years and consequent releases of LLAE reserves reduced reported net LLAE for both nine-months 2011 and nine-months 2010, but such downward revisions and releases receded to $7.7 billion in nine-months 2011 from $11.5 billion in nine-months 2010. Excluding those amounts, net LLAE increased $29.8 billion, or 12.3 percent, to $271.7 billion in nine-months 2011 from $241.9 billion in nine-months 2010.

Reflecting the excess of increases in the costs of providing coverage over increases in premiums, the combined ratio deteriorated by 8.6 percentage points to 109.9 percent in nine-months 2011 from 101.2 percent in nine-months 2010.

The $34.9 billion in net losses on underwriting in nine-months 2011 amounted to 10.8 percent of the $323.8 billion in net premiums earned during the period, whereas the $6.3 billion in net losses on underwriting in nine-months 2010 amounted to 2 percent of the $315.7 billion in net premiums earned during that period.

“Growth in net written premiums accelerated to 3.1 percent in nine-months 2011 from 1.2 percent in nine-months 2010 and negative 4.6 percent in nine-months 2009. But results varied significantly by sector,” said Murray. “Excluding mortgage and financial guaranty insurers, net written premium growth for insurers writing predominantly commercial lines climbed to 3.9 percent in nine-months 2011 from negative 1.9 percent in nine-months 2010. Conversely, premium growth for insurers writing mostly personal lines slowed to 3.1 percent from 3.6 percent, and net written premium growth for insurers writing more balanced books of business decreased to 2.3 percent in nine-months 2011 from 2.5 percent in nine-months 2010.”

“While nine-month net written premium grew at the fastest rate since 2006, written premium growth continued to fall short of growth in insurers’ losses and loss adjustment expenses,” said Gordon. “In nine-months 2011, net written premiums increased 3.1 percent. Even excluding the effects of catastrophes, insurers’ losses and loss adjustment expenses rose 5.1 percent — about one and a half times as fast as premiums.”

“Reflecting the weakness in the economy, mortgage and financial guaranty insurers continued to suffer disproportionate losses on underwriting,” said Murray. “Mortgage and financial guaranty insurers’ combined ratio deteriorated 34.3 percentage points to 226 percent for nine-months 2011 from 191.7 percent for nine-months 2010, and their combined ratio for nine-months 2011 was 117.8 percentage points worse than the 108.2 percent combined ratio for the industry excluding mortgage and financial guaranty insurers.”

Mortgage and financial guaranty insurers’ net written premiums fell 6.2 percent to $3.9 billion for nine-months 2011 from $4.2 billion for nine-months 2010. Their net earned premiums fell 7 percent to $4.7 billion in nine-months 2011 from $5.1 billion a year earlier, with the 34.3-percentage-point deterioration in mortgage and financial guaranty insurers’ combined ratio primarily driven by a $0.9 billion increase in other underwriting expenses to $1.8 billion in nine-months 2011 from $0.9 billion a year earlier. Mortgage and financial guaranty insurers’ LLAE dropped $0.1 billion to $8.5 billion in nine-months 2011 from $8.6 billion a year earlier.

Excluding mortgage and financial guaranty insurers, industry net written premiums rose 3.2 percent in nine-months 2011 to $330.6 billion, earned premiums increased 2.7 percent to $319.1 billion, LLAE grew 15.2 percent to $255.5 billion, other underwriting expenses increased 2.5 percent to $91.8 billion, and dividends to policyholders were essentially unchanged from their level in nine-months 2010 at $1.1 billion. Reflecting those developments, the combined ratio for the industry excluding mortgage and financial guaranty insurers rose 8.5 percentage points to 108.2 percent for nine-months 2011 from 99.7 percent for nine-months 2010.

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