P/C Insurers' Profits And Profitability Through Nine-Months 2012 Bolster Industry's Ability to Withstand Hurricane Sandy

Jeffrey Brewer, PCI

(847) 553-3763

JERSEY CITY, N.J., December 28, 2012 — Prior to Hurricane Sandy, 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, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus climbing to 6.3 percent from 2 percent.

 

Insurers’ pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other 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. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 100.9 percent for nine-months 2012 from 109.8 percent for nine-months 2011, according to ISO, a Verisk Analytics company (Nasdaq:VRSK), and the Property Casualty Insurers Association of America (PCI).

 

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 benefitted 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 — insurers’ net worth measured according to Statutory Accounting Principles — 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.

 

Underwriting Results

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

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.

 

Reflecting the growth in premiums and the decline in LLAE, the combined ratio improved by 8.9 percentage points to 100.9 percent in nine-months 2012 from 109.8 percent in nine-months 2011.

“The drop in net LLAE from catastrophes is the main reason for the improvement in underwriting results in nine-months 2012,” said Gordon. “If net LLAE from catastrophes remained at the same level experienced in nine-months 2011, the combined ratio would have improved by only 3.4 percentage points to 106.3 percent instead of improving by 8.9 percentage points.”

 

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 $1.2 billion increase in favorable reserve development for the industry overall resulted from a drop in the amount of unfavorable reserve development experienced by mortgage and financial insurers, which fell to $1.2 billion in nine-months 2012 from $3.1 billion in nine-months 2011. Favorable reserve development for the industry excluding mortgage and financial guaranty insurers slipped to $10.2 billion in nine-months 2012 from $10.8 billion in nine-months 2011.  

 

Excluding development of LLAE reserves, total industry net LLAE fell $19 billion, or 7 percent, to $252.9 billion in nine-months 2012 from $271.8 billion in nine-months 2011, and the combined ratio improved by 8.6 percentage points to 103.5 percent from 112.2 percent.

 

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.”

 

Mortgage and financial guaranty insurers’ net written premiums dropped 7.8 percent to $3.6 billion for nine-months 2012 from $3.9 billion for nine-months 2011, and their net earned premiums fell 5.5 percent to $4.4 billion from $4.7 billion. The effects of these declines in premiums were more than offset by declines in LLAE and other underwriting expenses. Mortgage and financial guaranty insurers’ LLAE fell 22.8 percent to $6.6 billion in nine-months 2012 from $8.5 billion in nine-months 2011, and their other underwriting expenses dropped 63.8 percent to $0.7 billion from $1.8 billion.

 

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.”

 

 

Investment Results

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.

 

“The decline in insurers’ investment income in nine-months 2012 was driven by a drop in the yield on insurers’ cash and invested assets,” said Gordon. “As market interest rates declined, the annualized yield on insurers’ average cash and invested assets dropped from 3.8 percent in nine-months 2011 to 3.5 percent in nine-months 2012. Conversely, insurers’ average holdings of cash and invested assets — the funds on which insurers earn investment income — rose 1.8 percent from nine-months 2011 to nine-months 2012.”

 

Combining the $3 billion in realized capital gains in nine-months 2012 with $17.2 billion in unrealized capital gains during the same period, insurers posted $20.2 billion in overall capital gains for nine-months 2012 — up $27.4 billion from the $7.2 billion in overall capital losses for nine-months 2011.

 

“Insurers’ overall capital gains for nine-months 2012 reflect developments in financial markets. The Dow Jones Industrial Average increased 10 percent in nine-months 2012, as the New York Stock Exchange Composite rose 10.4 percent, the S&P 500 rose 14.6 percent, and the NASDAQ Composite climbed 19.6 percent,” said Murray. “With the financial crisis and Great Recession fading into history, insurers’ realized capital losses on impaired investments dropped from $13.9 billion in nine-months 2009 to $3.2 billion in nine-months 2010 and $2.5 billion in both nine-months 2011 and nine-months 2012.”

 

Pretax Operating Income

Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — jumped $26.8 billion to $30.6 billion for nine-months 2012 from $3.7 billion for nine-months 2011. The $26.8 billion increase in operating income reflects the $28 billion decrease in losses on underwriting and the $0.3 billion increase in miscellaneous other income, with those developments partially offset by the $1.5 billion decline in net investment income.

 

Mortgage and financial guaranty insurers’ operating income improved to negative $0.9 billion in nine-months 2012 from negative $4.6 billion in nine-months 2011. Excluding mortgage and financial guaranty insurers, the insurance industry’s operating income climbed $23.2 billion to $31.5 billion for nine-months 2012 from $8.3 billion for nine-months 2011.

 

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 nine-months 2012 totaled $27 billion — up $18.6 billion from $8.4 billion for nine-months 2011. The $18.6 billion increase in net income was the net result of the $26.8 billion increase in operating income, the $2.6 billion decrease in realized capital gains, and the $5.7 billion increase in federal and foreign income taxes.

 

Mortgage and financial guaranty insurers’ net income after taxes rose to negative $0.6 billion for nine-months 2012 from negative $4.3 billion for nine-months 2011. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes grew $14.9 billion to $27.6 billion for the nine months ending September 30, 2012, from $12.7 billion for the nine months ending September 30, 2011.

 

Policyholders’ Surplus

Policyholders’ surplus climbed $29.7 billion to $583.5 billion as of September 30, 2012, from $553.8 billion at year-end 2011. Additions to surplus in nine-months 2012 included insurers’ $27 billion in net income after taxes, $17.2 billion in unrealized capital gains on investments (not included in net income), $1.7 billion in new funds paid in, and $0.5 billion in miscellaneous other additions to surplus. Those additions were partially offset by $16.6 billion in dividends to shareholders.

 

Insurers’ $17.2 billion in unrealized capital gains on investments through nine-months 2012 constituted a $30 billion positive swing from their $12.7 billion in unrealized capital losses through nine-months 2011.

 

New funds paid in rose to $1.7 billion in nine-months 2012 from $1.6 billion in nine-months 2011.

 

Miscellaneous additions to surplus fell to $0.5 billion in nine-months 2012 from $2.6 billion in nine-months 2011.

Dividends to shareholders dropped $0.4 billion, or 2.2 percent, to $16.6 billion in nine-months 2012 from $17 billion in nine-months 2011.

 

Mortgage and financial guaranty insurers’ surplus rose to $11.6 billion as of September 30, 2012, from $11.4 billion at year-end 2011. Excluding mortgage and financial guaranty insurers, industry surplus rose $29.5 billion to $571.9 billion as of September 30 this year from $542.4 billion as of December 31, 2011.

 

“Using 12-month trailing premiums, the premium-to-surplus ratio as of September 30, 2012, was 0.77 — little changed from the 0.79 for full-year 2011 and the record-low 0.76 for full-year 2010, based on annual data extending back to 1959, and only about 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 September 30 this year was 0.99 — far below the 1.41 average LLAE-reserves-to-surplus ratio for the past 53 years,” said Murray. “These leverage ratios suggest insurers are exceptionally well capitalized, with insurers’ ample capacity to bear risk likely being the reason that recent firming in insurance markets has been so modest compared with previous cycles.”

 

Third-Quarter Results

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.

 

Mortgage and financial guaranty insurers’ annualized rate of return climbed to negative 6.3 percent in third-quarter 2012 from negative 95.9 percent in third-quarter 2011, as their net income after taxes rose to negative $0.2 billion from negative $2.7 billion. Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return increased to 7.5 percent in third-quarter 2012 from 4.5 percent in third-quarter 2011, as net income after taxes climbed to $10.6 billion from $6.1 billion.   

 

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.

 

Third-quarter 2012 net gains on underwriting amounted to 0.2 percent of the $116.1 billion in premiums earned during the period. In contrast, third-quarter 2011 net losses on underwriting amounted to 9.6 percent of the $111.4 billion in premiums earned during that period.

 

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.

 

The $0.2 billion in net gains on underwriting in third-quarter 2012 was after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders largely unchanged from their level in third-quarter 2011.

 

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.

 

Net earned premiums grew $4.7 billion, or 4.2 percent, to $116.1 billion in third-quarter 2012 from $111.4 billion in third-quarter 2011, with third-quarter net earned premiums growing at their fastest rate since the 9 percent for third-quarter 2006.

 

Excluding mortgage and financial guaranty insurers, net written premiums rose 5.2 percent in third-quarter 2012, net earned premiums rose 4.2 percent, LLAE fell 6.2 percent, and the combined ratio dropped to 97.9 percent from 105.8 percent in third-quarter 2011.

 

“In third-quarter 2012, the industry achieved its tenth successive quarter of growth in written premiums, following 12 quarters of declines,” said Gordon. “And earned premiums have now risen for 9 successive quarters, with the growth in earned premiums and sharp drop in catastrophe losses in third-quarter 2012 generating significant improvement in insurers’ overall results even as investment results deteriorated.”

 

The $11.4 billion in net investment income in third-quarter 2012 was down $0.3 billion, or 2.7 percent, compared with $11.7 billion in third-quarter 2011.

 

Miscellaneous other income dropped $0.8 billion to $0.4 billion in third-quarter 2012 from $1.2 billion in third-quarter 2011.

 

Realized capital gains on investments fell to $1.2 billion in third-quarter 2012 from $1.9 billion in third-quarter 2011.

 

Combining net investment income and realized capital gains, net investment gains dropped $1 billion, or 7 percent, to $12.7 billion in third-quarter 2012 from $13.6 billion a year earlier.

 

Insurers posted $6.1 billion in unrealized capital gains on investments in third-quarter 2012 — a $22.8 billion positive swing from insurers’ $16.7 billion in unrealized capital losses in third-quarter 2011. Combining realized and unrealized amounts, the insurance industry posted $7.4 billion in overall capital gains in third-quarter 2012 — a $22.2 billion swing from the $14.8 billion in overall capital losses on investments in third-quarter 2011.

 

The $7.4 billion in overall capital gains for third-quarter 2012 includes $0.6 billion in realized write-downs on impaired investments, with realized write-downs on impaired securities dropping from $1.2 billion in third-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 $190 billion in annual premium, 40 percent of the nation’s property casualty insurance. Member companies write 46 percent of the U.S. automobile insurance market, 32 percent of the homeowners market, 38 percent of the commercial property and liability market, and 41 percent of the private workers compensation market. For more information, visit www.pciaa.net.