ISO: P/C Insurers Full-Year Results Deteriorated In 2011 as Catastrophe Losses Spiked, But Fourth-Quarter Results Tell a Different Story

JERSEY CITY, N.J., April 16, 2012 — Private U.S. property/casualty insurers’ net income after taxes fell to $19.1 billion in 2011 from $35.2 billion in 2010, with insurers’ overall profitability as measured by their rate of return on average policyholders’ surplus dropping to 3.5 percent from 6.6 percent.

Driving the declines in insurers’ net income and overall rate of return, net losses on underwriting grew to $36.5 billion in 2011 from $10.5 billion in 2010. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 108.2 percent in 2011 from 102.4 percent in 2010, according to ISO, a Verisk Analytics company (Nasdaq:VRSK), and the Property Casualty Insurers Association of America (PCI).

The deterioration in underwriting results is primarily attributable to a spike in net losses and loss adjustment expenses (LLAE) from catastrophes. ISO estimates that insurers’ net LLAE from catastrophes rose to $38 billion in 2011 from $14.3 billion in 2010. These amounts exclude LLAE that emerged after insurers closed their books for each year but do include late-emerging LLAE from events in prior years. 

Partially offsetting the deterioration in underwriting results, net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — grew $2.8 billion to $56.2 billion in 2011 from $53.4 billion in 2010.

Insurers’ miscellaneous other income rose $1.2 billion to $2.3 billion in 2011 from $1.1 billion in 2010.

Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — fell to $14.8 billion for 2011 from $38.2 billion for 2010. Reflecting the decline in pretax operating income, reported federal and foreign income taxes dropped $6 billion to $2.9 billion from $8.8 billion.

Policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — fell $8.9 billion to $550.3 billion at December 31, 2011, from $559.2 billion at December 31, 2010.

Insurers’ 3.5 percent rate of return on average surplus for 2011 was the lowest full-year rate of return since the 0.6 percent for 2008 and the eighth lowest full-year rate of return in the 53 years since the start of ISO’s annual records in 1959. At 3.5 percent, insurers’ rate of return for 2011 was less than half of their 9 percent average rate of return from 1959 to 2011.

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 the most active and deadliest tornado season in more than half a century and a host of other challenges, insurers emerged from 2011 strong, well capitalized, and capable of paying future claims. At year-end 2011, insurers had $550.3 billion in policyholders’ surplus to cover new claims and meet other contingencies — 128 times all the direct insured losses to U.S. property from Hurricane Irene,” said Robert Gordon, PCI’s senior vice president for policy development and research. “Both insurers and state insurance regulators can be proud of the industry’s track record in fulfilling its obligations to policyholders in the face of last year’s massive catastrophe losses, just as the industry kept its promises all through the financial crisis and Great Recession. The latest data underscores that insurers continue to have the financial resources necessary to meet rising demand for coverage as the economy grows.”

“The 108.2 percent combined ratio for 2011 is the worst annual underwriting result since the 115.9 percent combined ratio for 2001. Poor underwriting results are particularly problematic in the current environment because of the toll that long-term declines in interest rates and investment leverage have taken on insurers’ ability to use investment earnings to balance underwriting losses,” said Michael R. Murray, assistant vice president for financial analysis at ISO. “For example, in the 1980s, insurers’ overall rate of return averaged 10.3 percent even though the combined ratio averaged 109.3 percent. That is, insurers’ 3.5 percent overall rate of return for 2011 was only about one-third of their average rate of return in the 1980s even though insurers’ 108.2 percent combined ratio for 2011 was more than a full percentage point better than the average combined ratio back then. Bottom line, insurers now need much better underwriting results just to be as profitable as they once were.”

The property/casualty industry’s 3.5 percent rate of return for 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’ rate of return on average surplus deteriorated to negative 51.4 percent in 2011 from negative 36.6 percent in 2010. Excluding mortgage and financial guaranty insurers, the industry’s rate of return fell to 4.6 percent in 2011 from 7.6 percent in 2010.

Underwriting Results

Underwriting gains (or losses) equal earned premiums minus LLAE, other underwriting expenses, and dividends to policyholders. Net losses on underwriting grew $26 billion to $36.5 billion in 2011 from $10.5 billion in 2010, as growth in LLAE and other underwriting expenses outpaced growth in earned premiums.

Net written premiums rose $13.8 billion, or 3.3 percent, to $437.6 billion for 2011 from $423.8 billion for 2010, as net earned premiums rose $11.7 billion, or 2.8 percent, to $433.9 billion from $422.2 billion.

Net LLAE (after reinsurance recoveries) climbed $33.8 billion, or 10.9 percent, to $344.5 billion in 2011 from $310.7 billion in 2010.

Other underwriting expenses — primarily acquisition expenses; expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — rose $4.4 billion, or 3.7 percent, to $124.1 billion in 2011 from $119.8 billion in 2010.

Dividends to policyholders dropped to $1.8 billion in 2011 from $2.3 billion in 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 $23.7 billion to $38 billion in 2011 from $14.3 billion in 2010. Other net LLAE rose $10.1 billion, or 3.4 percent, to $306.4 billion in 2011 from $296.3 billion in 2010.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in 2011 caused $33.6 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers), up $19.3 billion compared with the direct insured losses caused by catastrophes striking the United States in 2010 and $17.5 billion more than the $16.2 billion average for direct insured catastrophe losses during the 20 years through 2011.

U.S. insurers’ $38 billion in net LLAE from catastrophes in 2011 included an estimated $32.3 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 2011 included between $4.5 billion and $6.5 billion in LLAE from catastrophes occurring elsewhere around the globe — events such as the floods in Thailand during the latter half of 2011, the earthquake and tsunami that devastated northeastern Japan on March 11, and the earthquake that rocked Christchurch, New Zealand, on February 22 (February 21 UTC).

Reflecting the excess of increases in the cost of providing coverage over increases in premiums, the combined ratio deteriorated by 5.8 percentage points to 108.2 percent in 2011 from 102.4 percent in 2010.

“The spike in net LLAE from catastrophes accounts for the bulk of the deterioration in underwriting results last year,” said Gordon. “If net LLAE from catastrophes remained at the same level experienced in 2010, the combined ratio would have risen by only 0.3 percentage points to 102.7 percent.”

The $36.5 billion in net losses on underwriting in 2011 amounted to 8.4 percent of the $433.9 billion in net earned premiums during the year, whereas the $10.5 billion in net losses on underwriting in 2010 amounted to 2.5 percent of the $422.2 billion in net earned premiums during that year.

Based on new information and updated estimates for the ultimate cost of old claims from prior accident years, insurers’ results for calendar year 2011 benefited from $11 billion in favorable development of LLAE reserves, with the amount of favorable development rising from $9.7 billion in calendar year 2010. Excluding development of LLAE reserves, net LLAE increased $35.1 billion, or 11 percent, to $355.5 billion in 2011 from $320.4 billion in 2010, and the combined ratio deteriorated by 6 percentage points to 110.7 percent from 104.7 percent.

“Growth in net written premiums accelerated to 3.3 percent in 2011 from 1.3 percent in 2010 and negative 3.8 percent in 2009. But growth didn’t accelerate across the board,” said Murray. “Premium growth for insurers writing predominantly commercial lines climbed to 4.3 percent in 2011 from negative 2.3 percent in 2010, while premium growth for insurers writing a more balanced mix of commercial and personal lines edged up to 2.4 percent from 2.3 percent. Conversely, premium growth for insurers writing mostly personal lines slowed to 2.9 percent last year from 3.8 percent in 2010.”

“Despite the fact that overall net written premiums grew at the fastest rate since 2006, underwriting profitability deteriorated for all three major segments of the industry,” said Gordon. “Personal lines insurers’ combined ratio rose 4.7 percentage points to 106 percent in 2011, commercial lines insurers’ combined ratio increased 5.2 percentage points to 110.2 percent, and balanced insurers’ combined ratio jumped 8.4 percentage points to 109 percent.”

“Mortgage and financial guaranty insurers continued to suffer disproportionate losses on underwriting,” said Murray. “Mortgage and financial guaranty insurers’ combined ratio deteriorated 42.5 percentage points to 235.8 percent for 2011 from 193.3 percent for 2010, and mortgage and financial guaranty insurers’ combined ratio for 2011 was 129.4 percentage points worse than the 106.4 percent combined ratio for all other insurers.”

Mortgage and financial guaranty insurers’ net written premiums fell 9.4 percent to $5.2 billion for 2011 from $5.8 billion for 2010. Their net earned premiums fell 8.7 percent to $6.2 billion in 2011 from $6.8 billion a year earlier. But the largest contributor to the 42.5-percentage-point deterioration in mortgage and financial guaranty insurers’ combined ratio was a $1.7 billion increase in underwriting expenses to $2.6 billion in 2011 from $0.9 billion a year earlier, with the increase in mortgage and financial guaranty insurers’ underwriting expenses primarily attributable to an increase in contributions to premium deficiency reserves. Mortgage and financial guaranty insurers’ LLAE dropped $0.5 billion to $11.5 billion in 2011 from $12.1 billion a year earlier.

Excluding mortgage and financial guaranty insurers, industry net written premiums rose 3.4 percent in 2011 to $432.4 billion, net earned premiums increased 3 percent to $427.7 billion, LLAE grew 11.5 percent to $332.9 billion, other underwriting expenses increased 2.3 percent to $121.5 billion, and dividends to policyholders declined 19.5 percent to $1.8 billion. As a result, the combined ratio for the industry excluding mortgage and financial guaranty insurers rose 5.5 percentage points to 106.4 percent for 2011 from 100.9 percent for 2010.

Investment Results

Insurers’ net investment income — primarily dividends from stocks and interest on bonds — increased 3 percent to $49 billion in 2011 from $47.6 billion in 2010. Insurers’ realized capital gains on investments grew $1.3 billion to $7.2 billion in 2011 from $5.9 billion a year earlier. Combining net investment income and realized capital gains, net investment gains rose $2.8 billion, or 5.2 percent, to $56.2 billion for 2011 from $53.4 billion for 2010.

“The growth in insurers’ investment income in 2011 resulted from a $2.3 billion increase in the dividends that one insurer received from a major noninsurance operation acquired in early 2010,” said Gordon. “Excluding that $2.3 billion, insurers’ net investment income actually declined by $0.8 billion, or 1.7 percent, to $46.7 billion in 2011 as a consequence of low interest rates and declines in investment income yields. Insurers’ average holdings of cash and invested assets — the assets on which insurers earn investment income — actually rose 2.4 percent in 2011 compared with their level a year earlier.”

Combining the $7.2 billion in realized capital gains in 2011 with $5.1 billion in unrealized capital losses during the year, insurers posted $2.1 billion in net capital gains for 2011 — down $19.8 billion from the $21.9 billion in capital gains on investments for 2010. Insurers’ net capital gains would have fallen more in 2011 if not for a decline in realized capital losses on impaired investments, which dropped to $4 billion in 2011 from $5.9 billion in 2010.

Pretax Operating Income

Pretax operating income fell $23.3 billion, or 61.2 percent, to $14.8 billion for 2011 from $38.2 billion for 2010. The $23.3 billion decrease in operating income was the net result of the $26 billion increase in net losses on underwriting, the $1.4 billion increase in net investment income, and the $1.2 billion increase in miscellaneous other income.

Mortgage and financial guaranty insurers’ operating income deteriorated to negative $6.7 billion in 2011 from negative $4 billion in 2010. Excluding mortgage and financial guaranty insurers, the insurance industry’s operating income fell $20.7 billion, or 49 percent, to $21.5 billion for 2011 from $42.2 billion for 2010.

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 2011 totaled $19.1 billion — down $16.1 billion, or 45.6 percent, from $35.2 billion for 2010. The $16.1 billion decline in net income was the net result of the $23.3 billion decrease in operating income, the $1.3 billion increase in realized capital gains, and the $6 billion decrease in federal and foreign income taxes.

Mortgage and financial guaranty insurers’ net income after taxes fell to negative $6.1 billion for 2011 from negative $4.4 billion for 2010. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes dropped $14.3 billion to $25.2 billion for 2011 from $39.6 billion for 2010.

Policyholders’ Surplus

Policyholders’ surplus decreased $8.9 billion, or 1.6 percent, to $550.3 billion as of December 31, 2011, from $559.2 billion at year-end 2010. Additions to surplus in 2011 included insurers’ $19.1 billion in net income after taxes, $2.2 billion in new funds paid in, and $0.6 billion in miscellaneous other changes in surplus. Those additions were more than offset by $5.1 billion in unrealized capital losses on investments (not included in net income) and $25.7 billion in dividends to shareholders.

The $2.2 billion in new funds paid in during 2011 was down from a record-high $27.5 billion in 2010.

At $0.6 billion in 2011, miscellaneous other changes in surplus were virtually unchanged from their level in 2010.

Insurers’ $5.1 billion in unrealized capital losses on investments in 2011 constituted a $21.1 billion swing from their $16 billion in unrealized capital gains in 2010.

Dividends to shareholders declined to $25.7 billion in 2011 from $31.4 billion in 2010.

Mortgage and financial guaranty insurers’ surplus fell to $11.4 billion as of December 31, 2011, from $12.3 billion at year-end 2010. Excluding mortgage and financial guaranty insurers, industry surplus fell $8 billion to $539 billion as of year-end 2011 from $546.9 billion as of December 31, 2010.

Because the state insurance guaranty fund system does not protect those with mortgage or financial guaranty insurance claims in the event of insolvency, payouts on claims against individual mortgage and financial guaranty insurers are essentially limited by each mortgage and financial guaranty insurer’s own ability to pay. For this reason, ISO edited the data for some individual mortgage and financial guaranty insurers to eliminate liabilities in excess of their assets, restating surplus for the insurance industry overall and the mortgage and financial guaranty insurance sector in a manner that more correctly reflects the sector’s ability to absorb new losses.

“Using 12-month trailing premiums, the premium-to-surplus ratio as of December 31, 2011, was 0.80 — only slightly higher than the annual record-low 0.76 for full-year 2010 based on data extending back to 1959 and only a little more than half the 1.48 average premium-to-surplus ratio for the 53 years from 1959 to 2011. Similarly, the ratio of loss and loss adjustment expense reserves to surplus as of year-end 2011 was 1.04 — far below the 1.41 average LLAE-reserves-to-surplus ratio for the past 53 years,” said Murray. “To the extent that these leverage ratios shed light on the amount of risk supported by each dollar of surplus, insurers appear to be extremely well capitalized at this point. To the extent that these same leverage ratios shed light on insurers’ capacity utilization, they also suggest that excess capacity in competitive markets may continue to limit rate increases and premium growth absent a significant capital event such as a major catastrophe or downturn in financial markets.”

Fourth-Quarter Results

The property/casualty insurance industry’s consolidated net income after taxes rose to $11.2 billion in fourth-quarter 2011, up $3 billion from $8.1 billion in fourth-quarter 2010. Property/casualty insurers’ annualized rate of return on average surplus climbed to 8.2 percent in fourth-quarter 2011 from 5.9 percent a year earlier.

Mortgage and financial guaranty insurers’ annualized rate of return fell to negative 64.8 percent in fourth-quarter 2011 from negative 40.7 percent in fourth-quarter 2010, as their net income after taxes dropped to negative $1.8 billion from negative $1.2 billion. Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return rose to 9.7 percent in fourth-quarter 2011 from 6.9 percent in fourth-quarter 2010. 
  

“Insurers’ results for the last quarter of 2011 benefited from a number of positive developments, including acceleration in fourth-quarter premium growth to the fastest rate since 2004 and significantly slower growth in loss and loss adjustment expenses,” said Murray.

The insurance industry’s $11.2 billion in net income after taxes in fourth-quarter 2011 was the result of $11.5 billion in pretax operating income and $1.7 billion in realized capital gains on investments, less $2.1 billion in federal and foreign income taxes.

The industry’s pretax operating income grew $2.8 billion to $11.5 billion in fourth-quarter 2011 from $8.8 billion in fourth-quarter 2010. The industry’s fourth-quarter 2011 pretax operating income was the net result of $12.5 billion in net investment income and $0.6 billion in miscellaneous other income, less $1.6 billion in net losses on underwriting. Excluding mortgage and financial guaranty insurers, pretax operating income in fourth-quarter 2011 amounted to $13.6 billion — up $3.6 billion from $10 billion in fourth-quarter 2010.

The industry’s net losses on underwriting shrank $2.6 billion to $1.6 billion in fourth-quarter 2011 from $4.2 billion in fourth-quarter 2010, as growth in premiums outpaced growth in net LLAE and the other costs of providing insurance coverage.

Net written premiums rose $3.8 billion to $103.1 billion in fourth-quarter 2011 from $99.3 billion in fourth-quarter 2010, with growth in net written premiums accelerating to 3.8 percent in fourth-quarter 2011 from 1.7 percent in fourth-quarter 2010. Similarly, net earned premiums grew $3.7 billion to $110.2 billion in fourth-quarter 2011 from $106.5 billion in fourth-quarter 2010, with growth in net earned premiums accelerating to 3.5 percent in the last quarter of 2011 from 1.5 percent in the last quarter of 2010.

Net LLAE increased $0.2 billion to $80.4 billion in fourth-quarter 2011 from $80.2 billion in fourth-quarter 2010. But growth in net LLAE slowed to 0.2 percent in the last quarter of 2011 from 7.2 percent in the last quarter of 2010, despite an increase in net LLAE from catastrophes.

ISO estimates that the net LLAE from catastrophes included in private U.S. insurers’ financial results rose to $4.4 billion in fourth-quarter 2011 from $3.5 billion a year earlier. 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. The total for fourth-quarter 2011 includes an estimated $1.5 billion in net loss and loss adjustment expenses from catastrophes occurring outside the United States.

Excluding loss adjustment expenses, direct insured losses from catastrophes striking the United States in fourth-quarter 2011 amounted to $0.9 billion, down $2.5 billion from the $3.3 billion in direct insured losses caused by catastrophes that struck the United States in fourth-quarter 2010, according to ISO’s PCS unit.

Noncatastrophe net LLAE fell $0.8 billion, or 1 percent, in fourth-quarter 2011 as a result of updated estimates for the ultimate cost of claims that occurred in prior years. Insurers’ results for fourth-quarter 2011 benefited from $3.3 billion in favorable LLAE development for old claims — a $5.1 billion swing from the $1.8 billion in adverse LLAE development in fourth-quarter 2010.

Other underwriting expenses rose $1.3 billion, or 4.4 percent, to $30.6 billion in fourth-quarter 2011 from $29.3 billion in fourth-quarter 2010.

Dividends to policyholders dropped to $0.8 billion in the last quarter of 2011 from $1.2 billion in the last quarter of 2010.

The fourth-quarter 2011 net loss on underwriting amounted to 1.5 percent of the $110.2 billion in premiums earned during the period and compares with a fourth-quarter 2010 net loss on underwriting that amounted to 4 percent of the $106.5 billion in premiums earned during that period.

The industry’s fourth-quarter combined ratio improved to 103.4 percent in 2011 from 105.9 percent in 2010. At 103.4 percent, the fourth-quarter combined ratio for 2011 was 3.9 percentage points better than the 107.2 percent average fourth-quarter combined ratio since the start of ISO’s quarterly data in 1986.

Excluding mortgage and financial guaranty insurers, net written premiums rose 4.1 percent in fourth-quarter 2011, earned premiums rose 3.8 percent, LLAE increased 0.8 percent, and the combined ratio receded to 101.1 percent from 104.4 percent in fourth-quarter 2010.

“Written premium growth eased slightly to 3.8 percent in fourth-quarter 2011 from 4.1 percent in third-quarter 2011. Nonetheless, these quarterly premium growth rates were the fastest since the 9.6 percent increase in third-quarter 2006. Moreover, premiums have now grown for seven consecutive quarters,” said Gordon. “The continuing growth in premiums and the improvement in underwriting results are both welcome news, particularly because today’s low interest rates and the Federal Reserve’s pledge to keep interest rates low for some time to come continue to put pressure on insurers’ investment income.”

Net investment income rose $0.2 billion, or 1.6 percent, to $12.5 billion in fourth-quarter 2011 from $12.3 billion in fourth-quarter 2010.

Miscellaneous other income in fourth-quarter 2011 equaled $0.6 billion, essentially the same as miscellaneous other income in fourth-quarter 2010.

Realized capital gains on investments grew to $1.7 billion in fourth-quarter 2011 from $1.3 billion in fourth-quarter 2010.

Combining net investment income and realized capital gains, net investment gains rose $0.6 billion, or 4.6 percent, to $14.2 billion in fourth-quarter 2011 from $13.6 billion a year earlier.

Insurers posted $8 billion in unrealized capital gains on investments in fourth-quarter 2011 — down $4.6 billion from $12.6 billion in fourth-quarter 2010. Combining realized and unrealized amounts, the insurance industry posted $9.7 billion in net capital gains in fourth-quarter 2011 — down $4.2 billion from the $13.9 billion in net capital gains on investments in fourth-quarter 2010.

The $9.7 billion in net capital gains for fourth-quarter 2011 was after $1.6 billion in realized write-downs on impaired investments, with realized write-downs on impaired securities down from $2.7 billion in fourth-quarter 2010.

Policyholders’ surplus grew $11.7 billion to $550.3 billion at year-end 2011 from $538.6 billion at September 30, 2011, primarily as a result of insurers’ $11.2 billion in net income after taxes in fourth-quarter 2011. 

About ISO

Since 1971, ISO has been a leading source of information about property/casualty insurance risk. For a broad spectrum of commercial and personal lines of insurance, the company provides statistical, actuarial, underwriting, and claims information; policy language; information about specific locations; fraud-identification tools; and technical services. ISO serves insurers, reinsurers, agents and brokers, insurance regulators, risk managers, and other participants in the property/casualty insurance marketplace. ISO is a member of the Verisk Insurance Solutions group at Verisk Analytics (Nasdaq:VRSK). For more information, visit www.iso.com and www.verisk.com.

About PCI

PCI is composed of more than 1,000 member companies, representing the broadest cross-section of insurers of any national trade association. PCI members write over $179 billion in annual premium, 38.3 percent of the nation’s property casualty insurance. Member companies write 44.3 percent of the U.S. automobile insurance market, 31.6 percent of the homeowners market, 36.3 percent of the commercial property and liability market, and 42.6 percent of the private workers compensation market. For more information, visit www.pciaa.net.