ISO RELEASE: Property/Casualty Insurers’ Overall Financial Results Through Nine Months Improved As Investment Gains Offset Losses On Underwriting

ISO/PCI/INSURANCE INFORMATION INSTITUTE

Contacts:

Michael R. Murray, ISO
(201) 469-2339
Cliston Brown, PCI
(847) 553-3671
Loretta Worters, I.I.I.
(212) 346-5500

JERSEY CITY, N.J., Dec. 21, 2010 — Private U.S. property/casualty insurers’ net income after taxes rose to $26.7 billion through nine-months 2010 from $16.4 billion through nine-months 2009, with insurers’ annualized rate of return on average policyholders’ surplus — a key measure of overall profitability — increasing to 6.7 percent from 4.6 percent.

 

Reflecting insurers’ $26.7 billion in net income and other developments in the first nine months of 2010, policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — rose $33.5 billion, or 6.5 percent, to $544.8 billion at September 30, 2010, from $511.4 billion at year-end 2009.

 

Contributing to the increases in the insurance industry’s net income, overall rate of return, and surplus, insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — grew $13.1 billion to $39.5 billion in nine-months 2010 from $26.3 billion in nine-months 2009. 

 

Partially offsetting the growth in investment gains, insurers’ net losses on underwriting grew to $6.2 billion for nine-months 2010 from $3.2 billion for nine-months 2009. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 101.2 percent for nine-months 2010 from 100.7 percent for nine-months 2009, according to ISO and the Property Casualty Insurers Association of America (PCI).

 

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.

 

“Property/casualty insurers’ positive results for nine-months 2010 show that insurers are well positioned to meet the needs of consumers and business owners as the economy recovers from the Great Recession. Though often taken for granted, insurance capacity is critical to the nation’s economic health. Insurance makes it possible for consumers to finance homes and autos, and insurance makes it possible for businesses to operate secure in the knowledge that their customers, their workers, and their owners are protected when calamities strike,” said David Sampson, PCI’s president and CEO. “Combining insurers’ $544.8 billion in policyholders’ surplus as of September 30, their $556.8 billion in loss and loss adjustment expense reserves, and their $205.6 billion in unearned premium reserves, insurers had $1.3 trillion on hand to pay claims and meet other contingencies — up from $1.2 trillion at September 30, 2009.” 

 

“Assuming the economic recovery continues, we may see some firming in insurance markets down the road as increases in demand for insurance absorb some of the excess capacity that has weighed so heavily on many insurance markets,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “But, for now, leverage ratios continue to indicate that insurers have excess capacity. And the economic recovery is a double-edged sword. The same growth that generates stronger demand for insurance and consequent increases in written premiums will likely also lead to increases in losses as roads become more congested, foot traffic in stores and other establishments increases, and businesses hire more and more inexperienced employees. Moreover, there is a risk that inflation in claim severity will accelerate as the economy inches closer to full employment. Whether insurers’ bottom-line net income will benefit from the gathering strength in the economy remains to be seen.”

 

The property/casualty industry’s 6.7 percent annualized rate of return for nine-months 2010 is 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 for nine-months 2010 was negative 35.7 percent, up from negative 49.6 percent for nine-months 2009. Excluding mortgage and financial guaranty insurers, the industry’s annualized rate of return rose to 7.7 percent for the first nine months of 2010 from 6 percent for the first nine months of 2009.

 

“Though insurers’ net income and overall rate of return rose sharply in nine-months 2010, there are good reasons insurers aren’t celebrating. In a nutshell, the large gains for nine-months 2010 are a reflection of insurers’ weak results for nine-months 2009, with insurers’ results through nine-months 2010 remaining subpar despite recent gains,” said Murray. “Insurers’ 6.7 percent annualized rate of return for nine-months 2009 was nearly 1.9 percentage points less than their 8.6 percent average annualized rate of return through nine-months based on data extending back to 1986. And insurers’ rate of return remained far below benchmarks like the 13.9 percent long-term average rate of return for the Fortune 500.”

Underwriting Results

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

 

Much of the $3.1 billion increase in net losses on underwriting to $6.2 billion through nine-months 2010 reflects a decline in net earned premiums. Though net written premiums rose 0.8 percent to $323.1 billion for nine-months 2010 from $320.7 billion for nine-months 2009, net earned premiums fell 0.9 percent to $314.4 billion from $317.3 billion as a result of previous declines in written premiums.

 

Also contributing to the increase in net losses on underwriting, underwriting expenses — primarily acquisition expenses; expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — rose $2 billion, or 2.3 percent, to $90.1 billion through nine-months 2010 from $88.1 billion through nine-months 2009. And dividends to policyholders increased $0.1 billion to $1.1 billion in the first nine months of 2010 from $1 billion in the first nine months of 2009.

 

Tempering the effects of the decline in earned premiums and the increases in underwriting expenses and dividends to policyholders, net LLAE (after reinsurance recoveries) fell $2 billion, or 0.9 percent, to $229.5 billion through nine-months 2010 from $231.4 billion through nine-months 2009. The drop in overall LLAE reflects declines in both catastrophe and noncatastrophe LLAE.

 

ISO estimates that private insurers’ net LLAE from catastrophes striking the United States fell $0.3 billion to $11.2 billion for nine-months 2010 from $11.4 billion for nine-months 2009, with net catastrophe LLAE for nine-months 2009 including some late-emerging losses from Hurricane Ike in 2008.

 

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in the first nine months of 2010 caused $10.7 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual-market insurers and foreign insurers and reinsurers) — up $0.4 billion compared with the direct insured losses caused by catastrophes striking the United States in the first nine months of 2009, but $7.2 billion less than the $17.9 billion average for nine-month direct catastrophe losses during the past ten years.

 

Noncatastrophe net LLAE fell $1.7 billion, or 0.8 percent, to $218.3 billion for nine-months 2010 from $220 billion for nine-months 2009. Downward revisions to the estimated ultimate cost of claims incurred in prior periods and consequent releases of LLAE reserves account for slightly more than two-thirds of the decline in noncatastrophe LLAE, with LLAE reserve releases increasing $1 billion to $11.2 billion for nine-months 2010 from $10.3 billion for nine-months 2009.

 

“The 0.8 percent increase in nine-month written premiums is certainly welcome news, coming as it does after a string of declines. The increase in nine-month written premiums this year is the first since 2006, when premiums through nine months rose 5.1 percent,” said Sampson. “But there are indications that growth wasn’t shared equally by all insurers. On average for the first nine months of 2010, the Consumer Price Index for tenants’ and household insurance rose 3.5 percent compared with its level a year earlier, as the Consumer Price Index for motor vehicle insurance rose 5.1 percent. But MarketScout’s Market Barometer for commercial lines fell 3.8 percent. This suggests that premiums for personal lines insurers rose, while premiums for commercial lines insurers remained weak.”

 

“The deterioration in underwriting profitability as measured by the combined ratio is a particular cause for concern, because today’s low investment yields and the same long-term decline in investment leverage that helped insulate insurers from the ravages of the financial crisis and the Great Recession mean insurers now need better underwriting results just to be as profitable as they once were,” said Murray. “For nine-months 1986, insurers achieved a 14.9 percent annualized rate of return with a combined ratio of 108 percent. But because of declines in investment yields and investment leverage, insurers’ 6.7 percent annualized rate of return for nine-months 2010 was 8.1 percentage points lower, even though the combined ratio was 6.8 percentage points better.” 

 

The $6.2 billion net loss on underwriting for nine-months 2010 amounted to 2 percent of the $314.4 billion in net premiums earned during the period, whereas the $3.2 billion net loss on underwriting for nine-months 2009 amounted to 1 percent of the $317.3 billion in net premiums earned during that period.

 

“Reflecting the residual weakness in the economy and foreclosure rates, mortgage and financial guaranty insurers continued to suffer disproportionate losses on underwriting,” said Sampson. “Mortgage and financial guaranty insurers’ net written premiums declined 14.5 percent to $4.2 billion for nine-months 2010, and their net earned premiums dropped 11.1 percent to $5.1 billion. Reflecting these declines in premiums and a sharp increase in underwriting expenses, mortgage and financial guaranty insurers’ combined ratio deteriorated to 192.2 percent for nine-months 2010 from 175 percent for nine-months 2009, even though their loss and loss adjustment expenses dropped 9.4 percent to $8.4 billion. Excluding mortgage and financial guaranty insurers, industry net written premiums rose 1 percent, earned premiums dropped 0.7 percent, loss and loss adjustment expenses fell 0.5 percent, and the combined ratio rose to 99.7 percent for nine-months 2010 from 99.3 percent a year earlier.”

Investment Results

Insurers’ net investment income — primarily dividends from stocks and interest on bonds — dipped $0.9 billion to $35 billion for nine-months 2010 from $35.9 billion for nine-months 2009. But insurers’ $4.4 billion in realized capital gains on investments through nine-months 2010 constituted a $14 billion swing from insurers’ $9.6 billion in realized capital losses on investments through nine-months 2009. Combining net investment income and realized capital gains, overall net investment gains rose 49.8 percent to $39.5 billion for the first nine months of this year from $26.3 billion for the first nine months of 2009.

 

Combining the $4.4 billion in realized capital gains through nine-months 2010 with $3.1 billion in unrealized capital gains during the period, insurers posted $7.5 billion in overall capital gains for the first nine months of 2010 — a $2.1 billion increase compared with insurers’ $5.4 billion in overall capital gains on investments for the first nine months of 2009.

 

“The 2.5 percent decline in insurers’ investment income in nine-months 2010 was the product of offsetting changes in investment yields and the amount of insurers’ investments,” said Murray. “In particular, insurers’ annualized yield on cash and invested assets dropped to 3.7 percent for nine-months 2010 from 4 percent for nine-months 2009 as insurers’ average holdings of cash and invested assets rose 4.9 percent. Prospectively, there is some risk that insurers’ investment income will decline further as they replace maturing bonds paying relatively high yields with new bonds paying less.”

 

“Insurers’ overall capital gains for nine-months 2010 reflect developments in financial markets. The S&P 500 rose 2.3 percent from year-end 2009 to September 30, 2010, the Dow Jones Industrial Average increased 3.5 percent, and the NASDAQ composite climbed 4.4 percent,” said Sampson. “Insurers’ investment results also benefited from a decline in realized capital losses on impaired investments, which dropped to $3.1 billion through nine-months 2010 from $13.6 billion through nine-months 2009.”

Pretax Operating Income

Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — fell $4.8 billion, or 14.1 percent, to $29.2 billion for nine-months 2010 from $33.9 billion for nine-months 2009. The $4.8 billion decrease in operating income was a result of the $3.1 billion increase in net losses on underwriting, the $0.9 billion decline in net investment income, and a $0.8 billion decline in miscellaneous other income to $0.4 billion for nine-months 2010 from $1.2 billion for nine-months 2009.

 

Mortgage and financial guaranty insurers’ operating income fell to negative $2.8 billion through nine-months 2010 from negative $2.3 billion through nine-months 2009. Excluding mortgage and financial guaranty insurers, the insurance industry’s operating income fell $4.3 billion, or 12 percent, to $31.9 billion for the first nine months of 2010 from $36.3 billion for the first nine months of 2009.

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 through nine-months 2010 totaled $26.7 billion — up from $16.4 billion through nine-months 2009. The $10.2 billion increase in net income was the net result of the $4.8 billion decrease in operating income, the $14 billion swing to $4.4 billion in realized capital gains from $9.6 billion in realized capital losses, and a $1 billion decrease in federal and foreign income taxes to $6.9 billion for nine-months 2010 from $7.9 billion a year earlier.

 

Mortgage and financial guaranty insurers’ net income after taxes rose to negative $3.1 billion for nine-months 2010 from negative $4.3 billion for nine-months 2009. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes increased $9.1 billion to $29.8 billion for the nine months ending September 30, 2010, from $20.7 billion for the nine months ending September 30, 2009.

Policyholders’ Surplus

Policyholders’ surplus increased $33.5 billion to $544.8 billion as of September 30, 2010, from $511.4 billion at year-end 2009. Additions to surplus in nine-months 2010 included insurers’ $26.7 billion in net income after taxes, $3.1 billion in unrealized capital gains on investments (not included in net income), and $23.8 billion in new funds paid in (new capital raised by insurers). Those additions were partially offset by $19.5 billion in dividends to shareholders and $0.6 billion in miscellaneous other charges against surplus.

 

The $23.8 billion in new funds paid through nine-months 2010 was up from $3.9 billion through nine-months 2009 and is the largest amount for the first nine months of any year since the start of ISO’s quarterly data in 1986. The record-high $23.8 billion for nine-months 2010 included $22.5 billion contributed to one insurer by its parent as the insurer absorbed a major acquisition outside the insurance space. The previous record high for new funds through nine months was $7.2 billion in 2008.

 

Insurers’ unrealized capital gains on investments dropped to $3.1 billion in nine-months 2010 from $15 billion in nine-months 2009.

 

The $19.5 billion in dividends to shareholders for nine-months 2010 was more than double the $8.1 billion in dividends to shareholders for nine-months 2009.

 

The $0.6 billion in miscellaneous charges against surplus through nine-months 2010 compares with $6.1 billion in miscellaneous additions to surplus through nine-months 2009.

 

Mortgage and financial guaranty insurers’ surplus rose to $11.9 billion as of September 30, 2010, from $11.6 billion at year-end 2009. Excluding mortgage and financial guaranty insurers, industry surplus rose $33.1 billion to $533 billion as of September 30 this year from $499.8 billion as of December 31, 2009.

 

“Using 12-month trailing premiums, the premium-to-surplus ratio as of September 30, 2010, was 0.77 — less than it was any year from 1959 to 2009 and only about half the 1.50 average premium-to-surplus ratio for those 51 years. Similarly, the ratio of loss and loss adjustment expense reserves to surplus as of September 30 this year was 1.02 — far below the 1.43 average LLAE-reserves-to-surplus ratio for the past 51 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.”

Third-Quarter Results

The property/casualty insurance industry’s consolidated net income after taxes fell 3.2 percent to $10.1 billion in third-quarter 2010 from $10.5 billion in third-quarter 2009. This decline in net income resulted in a drop in property/casualty insurers’ annualized rate of return on average surplus to 7.5 percent in the third quarter of this year from 8.8 percent in the third quarter of last year.

 

Mortgage and financial guaranty insurers’ annualized rate of return fell to negative 16.8 percent in third-quarter 2010 from negative 1 percent in third-quarter 2009, as their net income after taxes dropped to negative $0.5 billion from just below zero. Excluding mortgage and financial guaranty insurers, the industry’s annualized rate of return receded to 8.1 percent in third-quarter 2010 from 9 percent a year earlier, even though its net income rose 1.5 percent.

 

Third-quarter 2010 net income for the entire industry consisted of $10 billion in pretax operating income and $2.2 billion in realized capital gains on investments, less $2.1 billion in federal and foreign income taxes.

 

The industry’s third-quarter pretax operating income of $10 billion was down 13.4 percent from $11.5 billion in third-quarter 2009. Third-quarter 2010 operating income consisted of $1.2 billion in net losses on underwriting, $11.4 billion in net investment income, and negative $0.3 billion in miscellaneous other income. Excluding mortgage and financial guaranty insurers, operating income fell 12.9 percent to $10.8 billion in third-quarter 2010 from $12.4 billion in third-quarter 2009.

 

The $1.2 billion in net losses on underwriting in third-quarter 2010 was up from the $1 billion in net losses on underwriting in third-quarter 2009.

 

Third-quarter 2010 net losses on underwriting amounted to 1.1 percent of the $107.3 billion in premiums earned during the period, compared with third-quarter 2009 net losses on underwriting amounting to 1 percent of the $106.2 billion in premiums earned during that period.

 

The industry’s combined ratio receded to 100.2 percent in third-quarter 2010 from 100.5 percent in third-quarter 2009.

 

The $1.2 billion in net losses on underwriting for third-quarter 2010 is after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders essentially unchanged from their level in third-quarter 2009.

 

Written premiums rose $2.5 billion, or 2.3 percent, to $110.7 billion in third-quarter 2010 from $108.2 billion in third-quarter 2009. The 2.3 percent increase in third-quarter 2010 followed a 1.3 percent increase in second-quarter 2010. These increases in quarterly written premiums were the first since first-quarter 2007, when written premiums rose 0.8 percent compared with their level a year earlier.

 

Reflecting recent increases in written premiums, earned premiums rose $1.1 billion, or 1.1 percent, to $107.3 billion in third-quarter 2010 from $106.2 billion in third-quarter 2009. The 1.1 percent increase in quarterly earned premium was the first since third-quarter 2008, when earned premiums rose 1.3 percent.

 

Loss and loss adjustment expenses were virtually unchanged at $77.6 billion in third-quarter 2010 and third-quarter 2009.

 

LLAE for third-quarter 2010 included an estimated $1.9 billion in net LLAE (after reinsurance recoveries) attributable to catastrophes striking the United States, with estimated net catastrophe LLAE falling $0.8 billion from $2.7 billion in third-quarter 2009.

 

Excluding loss adjustment expenses, direct insured losses from catastrophes during third-quarter 2010 totaled $1.9 billion, down $0.8 billion from the direct insured losses from catastrophes during third-quarter 2009, according to ISO’s PCS unit.

 

Excluding mortgage and financial guaranty insurers, net written premiums rose 2.3 percent in third-quarter 2010, earned premiums increased 1.1 percent, loss and loss adjustment expenses grew 0.6 percent, and the combined ratio edged down to 98.9 percent from 99 percent in third-quarter 2009.

 

“The 2.3 percent growth in written premiums in third-quarter 2010 follows a 1.3 percent increase in second-quarter 2010, with those increases following 12 consecutive quarters of declines in premiums,” said Sampson. “Moreover, with the increases in written premiums beginning to work their way through earned premiums and down to insurers’ bottom line, sustained growth in written premiums from this point forward could bring about improvement in underwriting and overall financial results. But there are two big question marks hanging over everything: Will the economy suffer a relapse? And if growth continues, will increases in demand absorb enough excess capacity to bring about a turn in commercial insurance markets?”

 

The $11.4 billion in net investment income in third-quarter 2010 was down $0.9 billion, or 7 percent, compared with the $12.3 billion in net investment income in third-quarter 2009.

 

Miscellaneous other income fell to negative $0.3 billion in third-quarter 2010 from positive $0.3 billion in third-quarter 2009.

 

The $2.2 billion in realized capital gains on investments in the third quarter of 2010 was up $0.7 billion compared with the $1.5 billion in realized capital gains in the third quarter of 2009.

 

Combining net investment income and realized capital gains, the industry posted $13.6 billion in net investment gains in third-quarter 2010, down 1.4 percent from $13.8 billion a year earlier.

 

Insurers posted $9.8 billion in unrealized capital gains in third-quarter 2010, down $6 billion from the $15.8 billion in unrealized capital gains on investments in third-quarter 2009. Summing realized and unrealized capital gains, insurers’ overall capital gains on investments dropped to $12 billion in third-quarter 2010 from $17.4 billion a year earlier.

 

The $12 billion in overall capital gains for third-quarter 2010 included $0.9 billion in realized write-downs on impaired securities, with realized write-downs on impaired securities up from $0.8 billion in third-quarter 2009.