P/C Insurers’ Pre-Sandy Results Show Reduced Catastrophe Losses

Before Hurricane Sandy hit, private U.S. property/casualty insurers’ net income after taxes grew to $27 billion in nine-months 2012 from $8.4 billion in nine-months 2011.

Insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus climbed to 6.3 percent from 2 percent.

Insurers’ pretax operating income rose to $30.6 billion in nine-months 2012 from $3.7 billion in nine-months 2011.

Improvement in underwriting results drove the increases in insurers’ pretax operating income, net income after taxes, and overall rate of return, with net losses on underwriting dropping to $6.7 billion in nine-months 2012 from $34.7 billion in nine-months 2011, according to ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI)

The industry’s combined ratio improved to 100.9 percent for nine-months 2012 from 109.8 percent for nine-months 2011.

ISO and PCI said the improvement in underwriting results is largely attributable to a drop in net losses and loss adjustment expenses (LLAE) from catastrophes.

ISO estimates that insurers’ net LLAE from catastrophes in nine-months 2012 totaled $16.7 billion, down from $35.1 billion in nine-months 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.

Insurers’ net income after taxes also benefited from a $0.3 billion increase in miscellaneous other income to $2.1 billion in nine-months 2012 from $1.8 billion in nine-months 2011.

The improvement in underwriting results and increase in miscellaneous other income were partially offset by a drop in net investment gains and higher taxes. Net investment gains – the sum of net investment income and realized capital gains (or losses) on investments – fell $4.1 billion to $38.1 billion in nine-months 2012 from $42.2 billion in nine-months 2011, as insurers’ federal and foreign income taxes rose $5.7 billion to $6.6 billion from $0.9 billion.

Policyholders’ surplus grew $29.7 billion to a record $583.5 billion at September 30, 2012, from $553.8 billion at year-end 2011, largely as a result of insurers’ $27 billion in net income after taxes.

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.

“Results like those for nine-months 2012 provide insurers with the financial wherewithal necessary to absorb shock losses such as those inflicted by Hurricane Sandy last October and continue to fulfill their commitments to policyholders,” said Robert Gordon, PCI’s senior vice president for policy development and research. “Insurers’ record-high $583.5 billion in policyholders’ surplus as of September 30 means insurers have more than enough capital to cover losses from Hurricane Sandy and satisfy the coverage needs of a growing economy. The horrific damage and human suffering caused by storms like Sandy are truly tragic, but insurers can be proud of the part they play in helping people and businesses get back on their feet.”

“We won’t know the full cost of Hurricane Sandy for some time to come, but Sandy will certainly take a toll on insurers’ results for fourth-quarter and full-year 2012, and it will do so at a time when record-low interest rates and insurers’ conservative investment leverage make it profoundly difficult for insurers to use investment gains to offset underwriting losses,” said Michael R. Murray, ISO assistant vice president for financial analysis. “Moreover, as good as insurers’ results for nine-months 2012 were in comparison to their results for nine-months 2011, insurers’ 6.3 percent annualized overall rate of return for nine-months 2012 fell far short of their 9 percent average rate of return for the 53 years from the start of ISO’s annual data in 1959 to 2011. ISO estimates that, with today’s yields, leverage, and tax rates, underwriting profitability as measured by the combined ratio would have to improve by more than 4 full percentage points to 96.7 percent for insurers to earn their long-term average rate of return, which explains why so many insurers have made solid underwriting and risk-based pricing key priorities.”

The property/casualty industry’s 6.3 percent annualized rate of return for nine-months 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 improved to negative 7 percent for nine-months 2012 from negative 48.7 percent for nine-months 2011. Excluding mortgage and financial guaranty insurers, the industry’s annualized rate of return rose to 6.6 percent in nine-months 2012 from 3.1 percent in nine-months 2011.

<h6>Underwriting Results</h6>

Net losses on underwriting fell $28 billion to $6.7 billion in nine-months 2012 from $34.7 billion in nine-months 2011, as premiums rose and LLAE declined.

Net written premiums rose $14.1 billion, or 4.2 percent, to $349 billion for nine-months 2012 from $334.9 billion for nine-months 2011. Net earned premiums rose $11.2 billion, or 3.4 percent, to $335.3 billion from $324.1 billion.

Net LLAE (after reinsurance recoveries) dropped $20.2 billion, or 7.7 percent, to $243.9 billion in nine-months 2012 from $264.1 billion in nine-months 2011.

Partially negating the effects of the growth in premiums and decline in LLAE, other underwriting expenses – primarily acquisition expenses; expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes – increased $3.3 billion, or 3.5 percent, to $96.9 billion in nine-months 2012 from $93.6 billion in nine-months 2011.

Dividends to policyholders totaled $1.1 billion in nine-months 2012, essentially unchanged from dividends to policyholders in nine-months 2011.

The decrease in overall LLAE was largely driven by the decline in catastrophe losses, with ISO estimating that private insurers’ net LLAE from catastrophes fell $18.4 billion to $16.7 billion in nine-months 2012 from $35.1 billion in nine-months 2011. Other net LLAE fell $1.8 billion, or 0.8 percent, to $227.2 billion through nine-months 2012 from $229 billion through nine-months 2011.

U.S. insurers’ $16.7 billion in net LLAE from catastrophes in nine-months 2012 is primarily attributable to catastrophes that struck the United States. Though estimating U.S. insurers’ LLAE from catastrophes elsewhere around the globe is difficult, the available information suggests that U.S. insurers’ net LLAE from catastrophes overseas dropped to near nil in nine-months 2012 from between $3 billion and $5 billion in nine-months 2011.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in nine-months 2012 caused $16.2 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers), down $16.6 billion compared with the $32.8 billion in direct insured losses caused by catastrophes striking the United States in nine-months 2011 but $1.9 billion more than the $14.3 billion average for nine-month direct catastrophe losses during the past 20 years.

Underwriting results for nine-months 2012 also benefited from $8.9 billion in favorable development of LLAE reserves based on new information and updated estimates for the ultimate cost of old claims from prior accident years. The $8.9 billion in favorable reserve development in nine-months 2012 follows $7.7 billion of favorable development in nine-months 2011.

The $6.7 billion in net losses on underwriting in nine-months 2012 amounted to 2 percent of the $335.3 billion in net premiums earned during the period, whereas the $34.7 billion in net losses on underwriting in nine-months 2011 amounted to 10.7 percent of the $324.1 billion in net premiums earned during that period.

“Mortgage and financial guaranty insurers continued to suffer disproportionate losses on underwriting,” said Murray. “Though mortgage and financial guaranty insurers’ combined ratio dropped 60.6 percentage points to 165.4 percent for nine-months 2012 from 226 percent for nine-months 2011, their combined ratio for nine-months 2012 was 65.4 percentage points worse than the 100 percent combined ratio for the industry excluding mortgage and financial guaranty insurers.”

Excluding mortgage and financial guaranty insurers, industry net written premiums rose 4.4 percent in nine-months 2012 to $345.3 billion, net earned premiums increased 3.6 percent to $330.9 billion, LLAE fell 7.1 percent to $237.4 billion, other underwriting expenses increased 4.8 percent to $96.3 billion, and dividends to policyholders were essentially unchanged from their level in nine-months 2011 at $1.1 billion. As a result, the combined ratio for the industry excluding mortgage and financial guaranty insurers improved to 100 percent for nine-months 2012 from 108.1 percent for nine-months 2011.

“Growth in overall net written premiums accelerated to 4.2 percent in nine-months 2012 from 3.2 percent in nine-months 2011 and 1.2 percent in nine-months 2010. Nine-month written premiums haven’t grown this rapidly since 2006, when nine-month written premiums rose 5.1 percent compared with their level a year earlier,” said Murray. “Excluding mortgage and financial guaranty insurers, net written premium growth for insurers writing predominantly commercial lines accelerated the most, climbing to 6.1 percent in nine-months 2012 from 4 percent in nine-months 2011. Premium growth also accelerated for insurers writing more balanced books of business, with net written premium growth for those insurers rising to 3.8 percent in nine-months 2012 from 2.4 percent a year earlier. But premium growth for insurers writing predominantly personal lines business changed little, edging up to 3.3 percent in nine-months 2012 from 3.2 percent in nine-months 2011.”

“Reflecting the effects of premium growth and the drop in catastrophe losses, underwriting profitability improved for all three major sectors of the industry,” said Gordon. “Excluding mortgage and financial guaranty insurers, commercial lines insurers’ combined ratio dropped 6.8 percentage points to 98.6 percent in nine-months 2012, as balanced insurers’ combined ratio improved by 9.3 percentage points to 102.7 percent and personal lines insurers’ combined ratio fell 8.6 percentage points to 99.4 percent.”

<h6>Investment Results</h6>

Insurers’ net investment income – primarily dividends from stocks and interest on bonds – fell 4.1 percent to $35.1 billion in nine-months 2012 from $36.6 billion in nine-months 2011. Insurers’ realized capital gains on investments in nine-months 2012 dropped $2.6 billion to $3 billion from $5.5 billion a year earlier. Combining net investment income and realized capital gains, overall net investment gains declined $4.1 billion, or 9.7 percent, to $38.1 billion for nine-months 2012 from $42.2 billion for nine-months 2011.

<h6>Third-Quarter Results</h6>

The property/casualty insurance industry’s consolidated net income after taxes rose to $10.4 billion in third-quarter 2012, up $7 billion from $3.4 billion in third-quarter 2011. Property/casualty insurers’ annualized rate of return on average surplus increased to 7.2 percent in third-quarter 2012 from 2.5 percent a year earlier.

The $10.4 billion in net income after taxes for the entire insurance industry in third-quarter 2012 was a result of $12.1 billion in pretax operating income and $1.2 billion in realized capital gains on investments, less $2.9 billion in federal and foreign income taxes.

The industry’s $12.1 billion in pretax operating income for third-quarter 2012 was up $9.9 billion from $2.2 billion for third-quarter 2011. The industry’s third-quarter 2012 pretax operating income was a result of $0.2 billion in net gains on underwriting, $11.4 billion in net investment income, and $0.4 billion in miscellaneous other income. Excluding mortgage and financial guaranty insurers, pretax operating income for third-quarter 2012 amounted to $12.3 billion – a $7.3 billion increase from the $5 billion in pretax operating income for third-quarter 2011.

The $0.2 billion in net gains on underwriting for third-quarter 2012 was an $11 billion positive swing from the $10.7 billion in net losses on underwriting for third-quarter 2011.

ISO estimates that the net LLAE from catastrophes included in private U.S. insurers’ financial results fell to $4.1 billion in third-quarter 2012 from $9.4 billion a year earlier. 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.

Excluding loss adjustment expenses, direct insured losses from catastrophes striking the United States in third-quarter 2012 totaled $1.8 billion, down $6.6 billion from the $8.4 billion in direct insured losses caused by catastrophes that struck the United States in third-quarter 2011, according to ISO’s PCS unit.

The industry’s combined ratio improved to 98.5 percent in third-quarter 2012 from 108.5 percent in third-quarter 2011. At 98.5 percent for third-quarter 2012, the combined ratio improved to its best level for any quarter since third-quarter 2007, when the combined ratio was 95.9 percent. Since the start of ISO’s quarterly data in 1986, the third-quarter combined ratio has averaged 106.2 percent but has ranged from as high as 122.8 percent in 1992 when Hurricane Andrew and Hurricane Iniki struck to as low as 90.6 percent in 2006.

Net written premiums rose $5.9 billion, or 5.1 percent, to $121.8 billion in third-quarter 2012 from $115.9 billion in third-quarter 2011, with third-quarter net written premiums growing at their fastest rate since the 9.6 percent for third-quarter 2006.