JERSEY CITY, N.J., October 7, 2011 — Private U.S. property/casualty insurers’ net income after taxes fell to $4.8 billion in first-half 2011 from $16.8 billion in first-half 2010, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus decreasing to 1.7 percent from 6.4 percent.
Driving the declines in insurers’ net income and overall rate of return, net losses on underwriting grew to $24.1 billion in first-half 2011 from $5.1 billion in first-half 2010. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 110.5 percent for first-half 2011 from 101.7 percent for first-half 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 in first-half 2011 totaled $23.9 billion, up from $8 billion in first-half 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 $2.4 billion to $28.4 billion in first-half 2011 from $26 billion in first-half 2010.
Insurers’ miscellaneous other income fell $0.1 billion to $0.6 billion in first-half 2011 from $0.7 billion in first-half 2010, and their federal and foreign income taxes dropped $4.7 billion to $0.1 billion from $4.8 billion.
Policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — fell $0.2 billion to $559.1 billion at June 30, 2011, from $559.2 billion at year-end 2010.
Insurers’ 1.7 percent annualized rate of return on average surplus for first-half 2011 was the lowest for any first half since the start of ISO’s quarterly records in 1986 and 7.7 percentage points less than the 9.4 percent average first-half 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 record-setting catastrophe losses from events like the deadly EF 5 tornado that struck Joplin, Missouri, last May, insurers emerged from first-half 2011 financially sound and well able to continue providing essential financial protection to consumers and businesses alike — a quiet but important testament to insurers’ enterprise risk management and the effectiveness of state solvency regulation,” said David Sampson, PCI’s president and CEO. “As of June 30, 2011, insurers had $559.1 billion in policyholders’ surplus to cover new claims and meet other contingencies — more than 150 times all direct insured losses to U.S. property from Hurricane Irene. The industry is strong, well-capitalized, and capable of paying claims.”
“The 110.5 percent combined ratio for first-half 2011 is the worst six-month underwriting result since the 111.1 percent combined ratio for first-half 2001. Even after adjusting for record catastrophe losses, the latest data indicates that insurers continued to face strong 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 1.3 percentage points to 103 percent in first-half 2011 if net LLAE from catastrophes had remained the same as they were in first-half 2010. The deterioration in adjusted underwriting results is a particular cause for concern, because today’s low interest rates severely limit insurers’ ability to generate incremental investment income.”
The property/casualty industry’s 1.7 percent annualized rate of return for first-half 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 improved to negative 26.1 percent for first-half 2011 from negative 43.6 percent for first-half 2010. Excluding mortgage and financial guaranty insurers, the industry’s annualized rate of return fell to 2.3 percent in first-half 2011 from 7.6 percent in first-half 2010.
Underwriting Results
Underwriting gains (or losses) equal earned premiums minus LLAE, other underwriting expenses, and dividends to policyholders.
Net losses on underwriting grew $19 billion to $24.1 billion in first-half 2011 from $5.1 billion in first-half 2010, as growth in LLAE and other underwriting expenses outpaced growth in premiums earned.
Net written premiums rose $5.5 billion, or 2.6 percent, to $218.8 billion for first-half 2011 from $213.3 billion for first-half 2010. Net earned premiums rose $4.5 billion, or 2.2 percent, to $212.5 billion from $208 billion.
Net LLAE (after reinsurance recoveries) rose $21.7 billion, or 14.2 percent, to $174.2 billion in first-half 2011 from $152.5 billion in first-half 2010.
Other underwriting expenses — primarily acquisition expenses; expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — rose $1.8 billion, or 3.1 percent, to $61.6 billion in first-half 2011 from $59.8 billion in first-half 2010.
Dividends to policyholders totaled $0.8 billion in first-half 2011, essentially unchanged from dividends to policyholders in first-half 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 $15.9 billion to $23.9 billion in first-half 2011 from $8 billion in first-half 2010. Other net LLAE rose $5.7 billion, or 4 percent, to $150.3 billion through six-months 2011 from $144.5 billion through six-months 2010.
According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in first-half 2011 caused $23 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual-market insurers and foreign insurers and reinsurers), up $14.1 billion compared with the direct insured losses caused by catastrophes striking the United States in first-half 2010 and about three times the $7.7 billion average for first-half direct catastrophe losses during the past ten years.
U.S. insurers’ $23.9 billion in net LLAE from catastrophes in first-half 2011 included an estimated $19.7 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 first-half 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 first-half 2011 and first-half 2010. Such downward revisions and releases dropped to $7.3 billion in first-half 2011 from $9.1 billion in first-half 2010. Excluding those amounts, net LLAE increased $19.9 billion, or 12.3 percent, to $181.5 billion in first-half 2011 from $161.6 billion in first-half 2010.
Reflecting the excess of increases in the costs of providing coverage over increases in premiums, the combined ratio deteriorated by 8.8 percentage points to 110.5 percent in first-half 2011 from 101.7 percent in first-half 2010.
The $24.1 billion in net losses on underwriting in first-half 2011 amounted to 11.3 percent of the $212.5 billion in net premiums earned during the period, whereas the $5.1 billion in net losses on underwriting in first-half 2010 amounted to 2.5 percent of the $208 billion in net premiums earned during that period.
“Growth in net written premiums accelerated to 2.6 percent in first-half 2011 from 0.4 percent in first-half 2010 and negative 4.4 percent in first-half 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 2.9 percent in first-half 2011 from negative 3.1 percent in first-half 2010. Conversely, premium growth for insurers writing mostly personal lines slowed to 2.7 percent from 3.5 percent. Net written premium growth for insurers writing more balanced books of business increased to 2.2 percent in first-half 2011 from 1.7 percent in first-half 2010.”
“While the acceleration in first-half net written premium growth to the fastest rate in five years is certainly welcome news, written premium growth continued to fall short of nominal growth in the economy and insurers’ losses and loss adjustment expenses,” said Sampson. “In first-half 2011, U.S. current dollar GDP rose 3.9 percent compared with its level a year earlier, while insurers’ net written premiums increased 2.6 percent. Even excluding the effects of catastrophes, insurers’ losses and loss adjustment expenses rose 4 percent — again, 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. “Though mortgage and financial guaranty insurers’ combined ratio improved 10 percentage points to 186.3 percent for first-half 2011 from 196.4 percent for first-half 2010, their combined ratio for first-half 2011 was 76.9 percentage points worse than the 109.4 percent combined ratio for the industry excluding mortgage and financial guaranty insurers.”
Mortgage and financial guaranty insurers’ net written premiums fell 2.4 percent to $2.6 billion for first-half 2011 from $2.7 billion for first-half 2010. Their net earned premiums fell 7.2 percent to $3.1 billion in first-half 2011 from $3.3 billion a year earlier, with the 10-percentage-point improvement in mortgage and financial guaranty insurers’ combined ratio driven by a 16.6 percent drop in their LLAE to $4.9 billion in first-half 2011 from $5.8 billion in first-half 2010. Mortgage and financial guaranty insurers’ other underwriting expenses rose to $0.8 billion in first-half 2011 from $0.6 billion a year earlier.
Excluding mortgage and financial guaranty insurers, industry net written premiums rose 2.6 percent in first-half 2011 to $216.2 billion, earned premiums increased 2.3 percent to $209.4 billion, LLAE grew 15.4 percent to $169.3 billion, other underwriting expenses increased 2.8 percent to $60.8 billion, and dividends to policyholders were essentially unchanged from their level in first-half 2010 at $0.8 billion. Reflecting those developments, the combined ratio for the industry excluding mortgage and financial guaranty insurers rose 9.2 percentage points to 109.4 percent for first-half 2011 from 100.2 percent for first-half 2010.
Investment Results
Insurers’ net investment income — primarily dividends from stocks and interest on bonds — increased 4.5 percent to $24.8 billion in first-half 2011 from $23.7 billion in first-half 2010. Insurers’ net realized capital gains on investments in first-half 2011 grew $1.3 billion to $3.6 billion from $2.3 billion a year earlier. Combining net investment income and net realized capital gains, overall net investment gains rose $2.4 billion, or 9.2 percent, to $28.4 billion for first-half 2011 from $26 billion for first-half 2010.
“The growth in insurers’ investment income in first-half 2011 resulted from a $1.8 billion increase in the dividends that one insurer received from a major noninsurance operation acquired in early 2010,” said Sampson. “Excluding that $1.8 billion, insurers’ net investment income actually declined by $0.7 billion, or 2.8 percent, to $23.1 billion in first-half 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 4.8 percent in first-half 2011 compared with their level a year earlier.”
Combining the $3.6 billion in net realized capital gains in first-half 2011 with $3.9 billion in net unrealized capital gains during the same period, insurers posted $7.5 billion in net overall capital gains for first-half 2011 — an $11.8 billion swing from the $4.3 billion in overall capital losses on investments for first-half 2010.
“Insurers’ overall capital gains for first-half 2011 reflect developments in financial markets. The NASDAQ Composite and the New York Stock Exchange Composite both rose 4.5 percent during first-half 2011, with the S&P 500 rising 5 percent and the Dow Jones Industrial Average climbing 7.2 percent,” said Murray. “Insurers’ investment results also benefited from a decline in realized capital losses on impaired investments, which dropped to $1.2 billion in first-half 2011 from $2.2 billion in first-half 2010. But the major stock indexes all declined significantly in third-quarter 2011 and were down year-to-date as of the close on September 30 — meaning insurers’ results for nine-months 2011 may show overall capital losses instead of capital gains.”
Pretax Operating Income
Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — fell $18 billion, or 93.4 percent, to $1.3 billion for first-half 2011 from $19.3 billion for first-half 2010. The $18 billion decrease in operating income was the net result of the $19 billion increase in net losses on underwriting, the $1.1 billion increase in net investment income, and the $0.1 billion decline in miscellaneous other income.
Mortgage and financial guaranty insurers’ operating income improved to negative $1.8 billion in first-half 2011 from negative $2 billion in first-half 2010. Excluding mortgage and financial guaranty insurers, the insurance industry’s operating income fell $18.2 billion, or 85.4 percent, to $3.1 billion for first-half 2011 from $21.3 billion for first-half 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 first-half 2011 totaled $4.8 billion — down $12 billion, or 71.6 percent, from $16.8 billion for first-half 2010. The $12 billion decline in net income was the net result of the $18 billion decrease in operating income, the $1.3 billion increase in net realized capital gains, and the $4.7 billion decrease in federal and foreign income taxes.
Mortgage and financial guaranty insurers’ net income after taxes rose to negative $1.6 billion for first-half 2011 from negative $2.6 billion for first-half 2010. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes dropped $13.1 billion to $6.3 billion for the six months ending June 30, 2011, from $19.4 billion for the six months ending June 30, 2010.
Policyholders’ Surplus
Policyholders’ surplus decreased $0.2 billion to $559.1 billion as of June 30, 2011, from $559.2 billion at year-end 2010. Additions to surplus in first-half 2011 included insurers’ $4.8 billion in net income after taxes, $3.9 billion in net unrealized capital gains on investments (not included in net income), $1.5 billion in new funds paid in, and $0.1 billion in miscellaneous other additions to surplus. Those additions were more than offset by $10.4 billion in dividends to shareholders.
Insurers’ $3.9 billion in net unrealized capital gains on investments in first-half 2011 constituted a $10.5 billion swing from their $6.5 billion in net unrealized capital losses in first-half 2010.
The $1.5 billion in new funds paid in during first-half 2011 was down from $23.7 billion in first-half 2010.
Miscellaneous additions to surplus declined $0.2 billion to $0.1 billion in first-half 2011 from $0.3 billion in first-half 2010.
Dividends to shareholders declined to $10.4 billion in first-half 2011 from $12.9 billion in first-half 2010.
Mortgage and financial guaranty insurers’ surplus fell to $11.6 billion as of June 30, 2011, from $12.3 billion at year-end 2010. Excluding mortgage and financial guaranty insurers, industry surplus rose $0.6 billion to $547.5 billion as of June 30 this year from $546.9 billion as of December 31, 2010.
“Using 12-month trailing premiums, the premium-to-surplus ratio as of June 30, 2011, was 0.77 — almost identical to the record-low 0.76 for full-year 2010 based on annual data extending back to 1959 and only about 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 June 30 this year was 1.03 — far below the 1.42 average LLAE-reserves-to-surplus ratio for the past 52 years,” said Murray. “With leverage ratios such as these providing simple measures of the amount of risk supported by each dollar of surplus, insurers appear to be exceptionally well capitalized at this point. But to the extent that these same leverage ratios provide insight into insurers’ capacity utilization and the potential supply of insurance, they help explain why some insurance markets have remained so soft for so long.”
Second-Quarter Results
The property/casualty insurance industry’s consolidated net income after taxes fell to negative $3.1 billion in second-quarter 2011, down $10.8 billion from positive $7.8 billion in second-quarter 2010. Property/casualty insurers’ annualized rate of return on average surplus dropped to negative 2.2 percent in second-quarter 2011 from positive 5.8 percent a year earlier.
Mortgage and financial guaranty insurers’ annualized rate of return fell to negative 34.6 percent in second-quarter 2011 from negative 27.4 percent in second-quarter 2010, as their net income after taxes dropped to negative $1 billion from negative $0.8 billion. Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return fell to negative 1.5 percent in second-quarter 2011 from positive 6.5 percent in second-quarter 2010.
The $3.1 billion net loss after taxes for the entire insurance industry in second-quarter 2011 was a result of $7.3 billion in pretax operating losses, less $2.6 billion in net realized capital gains on investments and $1.7 billion in federal and foreign income tax recoveries.
The industry’s $7.3 billion in pretax operating losses for second-quarter 2011 was a $16.3 billion swing from the industry’s $9 billion in pretax operating income for second-quarter 2010. The industry’s second-quarter 2011 pretax operating losses were the net result of $19.6 billion in net losses on underwriting and $12.2 billion in net investment income. Excluding mortgage and financial guaranty insurers, pretax operating losses for second-quarter 2011 amounted to $6.3 billion — a $15.8 billion swing from $9.6 billion in pretax operating income for second-quarter 2010.
Net losses on underwriting grew $16.3 billion to $19.6 billion in second-quarter 2011 from $3.3 billion in second-quarter 2010.
ISO estimates that the net LLAE from catastrophes included in private U.S. insurers’ financial results rose to $17.4 billion in second-quarter 2011 from $5.8 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 second-quarter 2011 totaled $20.8 billion, up $14.4 billion from the direct insured losses caused by catastrophes that struck the United States in second-quarter 2010, according to ISO’s PCS unit.
Second-quarter 2011 net losses on underwriting amounted to 18.3 percent of the $107.3 billion in premiums earned during the period. Second-quarter 2010 net losses on underwriting amounted to 3.2 percent of the $104.8 billion in premiums earned during that period.
The industry’s combined ratio deteriorated to 117.6 percent in second-quarter 2011 from 102.3 percent in second-quarter 2010 — rising to its highest level since the 120.3 percent combined ratio for fourth-quarter 2001 and setting a new record high for the second quarter based on quarterly records extending back to 1986.
The $19.6 billion in net losses on underwriting was after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders up $0.1 billion from their level in second-quarter 2010.
Written premiums rose $1.7 billion, or 1.6 percent, to $109.7 billion in second-quarter 2011 from $108 billion in second-quarter 2010.
Earned premiums grew $2.4 billion, or 2.3 percent, to $107.3 billion in second-quarter 2011 from $104.8 billion in second-quarter 2010.
Excluding mortgage and financial guaranty insurers, net written premiums rose 1.7 percent in second-quarter 2011, earned premiums rose 2.5 percent, LLAE increased 23.3 percent, and the combined ratio climbed to 116.5 percent from 101.3 percent in second-quarter 2010.
“In second-quarter 2011, the industry achieved its fifth successive quarter of growth in written premiums, following 12 quarters of declines,” said Sampson. “But written premium growth slowed to 1.6 percent in second-quarter 2011 from 3.5 percent in first-quarter 2011, and economists warn that the economy is at risk of slipping back into recession. All of this suggests that insurers would be well advised to sharpen their focus on the core fundamentals of the insurance business — cost-based pricing, disciplined underwriting, solid claims adjudication, and risk management.”
The $12.2 billion in net investment income in second-quarter 2011 was up $0.2 billion, or 1.3 percent, compared with $12.1 billion in second-quarter 2010.
Miscellaneous other income dwindled to near nil in second-quarter 2011 from $0.2 billion in second-quarter 2010.
Net realized capital gains on investments climbed to $2.6 billion in second-quarter 2011 from $1.3 billion in second-quarter 2010.
Combining net investment income and net realized capital gains, net investment gains rose $1.5 billion, or 11.1 percent, to $14.8 billion in second-quarter 2011 from $13.4 billion a year earlier.
Insurers did not post meaningful amounts of net unrealized capital gains or losses on investments in second-quarter 2011, but that constituted an improvement from insurers’ $11.4 billion in net unrealized capital losses on investments in second-quarter 2010. Combining realized and unrealized amounts, the insurance industry posted $2.7 billion in net overall capital gains in second-quarter 2011 — a $12.8 billion swing from the $10.1 billion in net overall capital losses on investments in second-quarter 2010.
The $2.7 billion in overall capital gains for second-quarter 2011 was net of $0.5 billion in realized write-downs on impaired investments, with realized write-downs on impaired securities falling from $1.1 billion in second-quarter 2010.