ISO: P/C Insurers Underwriting And Overall Financial Results For Nine-Months 2011 Show Deterioration Driven By Spike In Catastrophe Losses

Driving the declines in insurers’ net income and overall rate of return, net losses on underwriting grew to $34.9 billion in nine-months 2011 from $6.3 billion in nine-months 2010. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — 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).

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 — the sum of net investment income and net realized capital gains (or losses) on investments — 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. “As of September 30, 2011, insurers had $538.6 billion in policyholders’ surplus to cover new claims and meet other contingencies — 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. “ISO estimates that 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. 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. 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

Underwriting gains (or losses) equal earned premiums minus LLAE, other underwriting expenses, and dividends to policyholders. 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.

Investment Results

Insurers’ net investment income — primarily dividends from stocks and interest on bonds — increased 3.5 percent to $36.5 billion in nine-months 2011 from $35.3 billion in nine-months 2010. Insurers’ realized capital gains on investments grew $0.9 billion to $5.5 billion in nine-months 2011 from $4.6 billion a year earlier. Combining net investment income and realized capital gains, overall investment gains rose $2.1 billion, or 5.4 percent, to $42 billion for nine-months 2011 from $39.8 billion for nine-months 2010.

“The growth in insurers’ investment income in nine-months 2011 resulted from a $2 billion increase in the dividends that one insurer received from a major noninsurance operation acquired in early 2010,” said Gordon. “Excluding that $2 billion, insurers’ net investment income actually declined by $0.8 billion, or 2.2 percent, to $34.5 billion in nine-months 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 — rose 2.7 percent in nine-months 2011 compared with their level a year earlier.”

Combining the $5.5 billion in realized capital gains in nine-months 2011 with $13.1 billion in unrealized capital losses during the same period, insurers posted $7.6 billion in capital losses for nine-months 2011 — a $15.6 billion swing from the $8 billion in capital gains on investments for nine-months 2010.

“Insurers’ capital losses for nine-months 2011 reflect developments in financial markets. The New York Stock Exchange Composite fell 14.7 percent from December 31, 2010, to September 30, 2011, with the S&P 500 falling 10 percent, the NASDAQ Composite dropping 9 percent, and the Dow Jones Industrial Average falling 5.7 percent,” said Murray. “Insurers’ capital losses would have been greater if not for a decline in realized capital losses on impaired investments, which dropped to $2.5 billion in nine-months 2011 from $3.2 billion in nine-months 2010. Nonetheless and barring either a year-end correction or a year-end rally, the fact that stock prices rose from September 30 to December 21 suggests insurers’ capital losses for full-year 2011 won’t be as a large as their capital losses through nine months.”

Pretax Operating Income

Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — fell $26.1 billion, or 88.8 percent, to $3.3 billion for nine-months 2011 from $29.4 billion for nine-months 2010. The $26.1 billion decrease in operating income was the net result of the $28.6 billion increase in net losses on underwriting, the $1.2 billion increase in net investment income, and the $1.3 billion increase in miscellaneous other income.

Mortgage and financial guaranty insurers’ operating income deteriorated to negative $4.6 billion in nine-months 2011 from negative $2.8 billion in nine-months 2010. Excluding mortgage and financial guaranty insurers, the insurance industry’s operating income fell $24.3 billion, or 75.5 percent, to $7.9 billion for nine-months 2011 from $32.2 billion for nine-months 2010.

Net Income after Taxes
Combining operating income, net realized capital gains (losses), and federal and foreign income taxes, the insurance industry’s net income after taxes for nine-months 2011 totaled $8 billion — down $19.1 billion, or 70.5 percent, from $27.1 billion for nine-months 2010. The $19.1 billion decline in net income was the net result of the $26.1 billion decrease in operating income, the $0.9 billion increase in net realized capital gains, and the $6.1 billion decrease in federal and foreign income taxes.

Mortgage and financial guaranty insurers’ net income after taxes fell to negative $4.3 billion for nine-months 2011 from negative $3.1 billion for nine-months 2010. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes dropped $18 billion to $12.3 billion for nine-months 2011 from $30.2 billion for nine-months 2010.

Policyholders’ Surplus

Policyholders’ surplus decreased $20.6 billion to $538.6 billion as of September 30, 2011, from $559.2 billion at year-end 2010. Additions to surplus in nine-months 2011 included insurers’ $8 billion in net income after taxes and $1.5 billion in new funds paid in. Those additions were more than offset by $13.1 billion in unrealized capital losses on investments (not included in net income), $16.9 billion in dividends to shareholders, and $0.1 billion in miscellaneous charges against surplus.

Insurers’ $13.1 billion in unrealized capital losses on investments in nine-months 2011 constituted a $16.5 billion swing from their $3.4 billion in unrealized capital gains in nine-months 2010.

The $1.5 billion in new funds paid in during nine-months 2011 was down from a record-high $23.7 billion in nine-months 2010.

Dividends to shareholders declined to $16.9 billion in nine-months 2011 from $19.7 billion in nine-months 2010.

The $0.1 billion in miscellaneous charges against surplus in nine-months 2011 was a $1.4 billion swing from the $1.3 billion in miscellaneous additions to surplus in nine-months 2010.

Mortgage and financial guaranty insurers’ surplus fell to $11 billion as of September 30, 2011, from $12.3  billion at year-end 2010. Excluding mortgage and financial guaranty insurers, industry surplus fell $19.3 billion to $527.6 billion as of September 30 this year from $546.9 billion as of December 31, 2010.

“Using 12-month trailing premiums, the premium-to-surplus ratio as of September 30, 2011, was 0.81 — 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 1.49 average premium-to-surplus ratio for the 52 years from 1959 to 2010. Similarly, the ratio of loss and loss adjustment expense reserves to surplus as of September 30 this year was 1.07 — far below the 1.42 average LLAE-reserves-to-surplus ratio for the past 52 years,” said Murray. “To the extent that these leverage ratios shed light on the amount of risk supported by each dollar of surplus and insurers’ capacity utilization, insurers appear to be extremely well positioned to meet society’s increasing demand for coverage as the economy improves.”

Third-Quarter Results

The property/casualty insurance industry’s consolidated net income after taxes fell to $3.2 billion in third-quarter 2011, down $7.1 billion from $10.3 billion in third-quarter 2010. Property/casualty insurers’ annualized rate of return on average surplus dropped to 2.3 percent in third-quarter 2011 from 7.6 percent a year earlier.

Mortgage and financial guaranty insurers’ annualized rate of return fell to negative 95.9 percent in third-quarter 2011 from negative 16.8 percent in third-quarter 2010, as their net income after taxes dropped to negative $2.7 billion from negative $0.5 billion. Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return fell to 4.4 percent in third-quarter 2011 from 8.2 percent in third-quarter 2010.

The $3.2 billion in net income after taxes for the entire insurance industry in third-quarter 2011 was a result of $2 billion in pretax operating income and $1.9 billion in net realized capital gains on investments, less $0.6 billion in federal and foreign income taxes.

The industry’s pretax operating income dropped $8.1 billion to $2 billion in third-quarter 2011 from $10.1 billion in third-quarter 2010. The industry’s third-quarter 2011 pretax operating income was the net result of $11.7 billion in net investment income and $1.1 billion miscellaneous other income, less $10.8 billion in net losses on underwriting. Excluding mortgage and financial guaranty insurers, pretax operating income in third-quarter 2011 amounted to $4.8 billion — down $6.1 billion from $10.8 billion in third-quarter 2010.

Net losses on underwriting grew $9.6 billion to $10.8 billion in third-quarter 2011 from $1.2 billion in third-quarter 2010, largely as a result of higher catastrophe losses. ISO estimates that the net LLAE from catastrophes included in private U.S. insurers’ financial results rose to $9.5 billion in third-quarter 2011 from $2.9 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.

Excluding loss adjustment expenses, direct insured losses from catastrophes striking the United States in third-quarter 2011 totaled $8.2 billion, up $6.2 billion from the $2 billion in direct insured losses caused by catastrophes that struck the United States in third-quarter 2010, according to ISO’s PCS unit.

Third-quarter 2011 net losses on underwriting amounted to 9.7 percent of the $111.3 billion in premiums earned during the period. Third-quarter 2010 net losses on underwriting amounted to 1.1 percent of the $107.7 billion in premiums earned during that period.

The industry’s third-quarter combined ratio deteriorated to 108.6 percent in 2011 from 100.2 percent in 2010 — rising to its highest level since the 112.3 percent combined ratio for third-quarter 2008.

The $10.8 billion in net losses on underwriting was after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders down $0.1 billion from their level in third-quarter 2010.

Written premiums rose $4.6 billion, or 4.1 percent, to $115.7 billion in third-quarter 2011 from $111.1 billion in third-quarter 2010.

Earned premiums grew $3.5 billion, or 3.3 percent, to $111.3 billion in third-quarter 2011 from $107.7 billion in third-quarter 2010.

Excluding mortgage and financial guaranty insurers, net written premiums rose 4.4 percent in third-quarter 2011, earned premiums rose 3.4 percent, LLAE increased 14.7 percent, and the combined ratio climbed to 105.9 percent from 98.9 percent in third-quarter 2010.

“Written premium growth accelerated to 4.1 percent in third-quarter 2011 from 1.6 percent in second-quarter 2011. But the positive impact of the fastest growth in premiums since third-quarter 2006 was blunted somewhat by deteriorating underwriting results,” said Gordon. “In addition, current 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.”

The $11.7 billion in net investment income in third-quarter 2011 was up $0.2 billion, or 1.4 percent, compared with $11.5 billion in third-quarter 2010.

Miscellaneous other income rose to $1.1 billion in third-quarter 2011 from negative $0.2 billion in third-quarter 2010.

Realized capital gains on investments dropped to $1.9 billion in third-quarter 2011 from $2.3 billion in third-quarter 2010.

Combining net investment income and realized capital gains, investment gains dropped $0.2 billion, or 1.7 percent, to $13.5 billion in third-quarter 2011 from $13.8 billion a year earlier.

Insurers posted $17 billion in unrealized capital losses on investments in third-quarter 2011, a $27 billion swing from the $10 billion in unrealized capital gains on investments in third-quarter 2010. Combining realized and unrealized amounts, the insurance industry posted $15.1 billion in capital losses in third-quarter 2011 — a $27.4 billion swing from the $12.2 billion in capital gains on investments in third-quarter 2010.

The $15.1 billion in capital losses for third-quarter 2011 was net of $1.2 billion in realized write-downs on impaired investments, with realized write-downs on impaired securities up from $1 billion in third-quarter 2010.