P/C Insurers’ Profits Jump in First Half as Catastrophe Losses Drop

U.S. property/casualty insurers’ net income after taxes jumped to $16.4 billion in first-half 2012 from $4.8 billion in first-half 2011, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus climbing to 5.9 percent from 1.7 percent.

Insurers’ pretax operating income – the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income – rose to $18.4 billion in first-half 2012 from $1.3 billion in first-half 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 $7 billion in first-half 2012 from $24.1 billion in first-half 2011. The combined ratio improved to 102.2 percent for first-half 2012 from 110.5 percent for first-half 2011, according to ISO 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 first-half 2012 totaled $12.6 billion, down from $25.7 billion in first-half 2011. 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.

Other items contributing to the increase in insurers’ net income after taxes include a $1.1 billion increase in miscellaneous other income to $1.7 billion in first-half 2012 from $0.6 billion in first-half 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 $3 billion to $25.4 billion in first-half 2012 from $28.4 billion in first-half 2011, as insurers’ federal and foreign income taxes rose $3.5 billion to $3.6 billion from $0.1 billion.

Policyholders’ surplus – insurers’ net worth measured according to Statutory Accounting Principles – grew $17.5 billion to $567.8 billion at June 30, 2012, from $550.3 billion at year-end 2011, largely as a result of insurers’ $16.4 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.

“The $17.5 billion increase in policyholders’ surplus to a near-record-high $567.8 billion at June 30, 2012, is a testament to the strength and safety of insurers’ commitment to policyholders,” said Robert Gordon, PCI’s senior vice president for policy development and research. “Despite challenging economic conditions, insurers are strong, well capitalized, and well prepared to pay future claims. Policyholders and regulators can rely on the insurance industry to fulfill its obligations when catastrophes strike.”

“While insurers’ overall results for first-half 2012 are certainly much better than their results for first-half 2011, insurers’ overall rate of return remains subpar compared with long-term historical norms, and insurers’ now need much better underwriting results just to be as profitable as they were in the past,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “Insurers’ 5.9 percent annualized rate of return on average surplus for first-half 2012 fell short of insurers’ 9 percent average overall rate of return for the 53 years from the start of ISO’s annual data in 1959 to 2011, even though the 102.2 percent combined ratio for first-half 2012 was 1.8 percentage points better than the 104 percent average combined ratio for the past 53 years. With investment yields, financial leverage, and tax rates like those in first-half 2012, ISO estimates that the combined ratio would have to improve almost 5 percentage points to 97.4 percent in order for insurers to earn their long-term average rate of return.”

The property/casualty industry’s 5.9 percent annualized rate of return for first-half 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 7.6 percent for first-half 2012 from negative 26.1 percent for first-half 2011. Excluding mortgage and financial guaranty insurers, the industry’s annualized rate of return rose to 6.2 percent in first-half 2012 from 2.3 percent in first-half 2011.

Underwriting Results

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

Net losses on underwriting fell $17.1 billion to $7 billion in first-half 2012 from $24.1 billion in first-half 2011, as premiums rose and LLAE declined.

Net written premiums rose $7.9 billion, or 3.6 percent, to $226.7 billion for first-half 2012 from $218.8 billion for first-half 2011. Net earned premiums rose $6.5 billion, or 3 percent, to $218.9 billion from $212.5 billion.

Net LLAE (after reinsurance recoveries) dropped $13.3 billion, or 7.6 percent, to $160.9 billion in first-half 2012 from $174.2 billion in first-half 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 $2.7 billion, or 4.3 percent, to $64.3 billion in first-half 2012 from $61.6 billion in first-half 2011.

Dividends to policyholders totaled $0.8 billion in first-half 2012, essentially unchanged from dividends to policyholders in first-half 2011.

The decrease in overall LLAE was driven by the decline in catastrophe losses, with ISO estimating that private insurers’ net LLAE from catastrophes fell $13.1 billion to $12.6 billion in first-half 2012 from $25.7 billion in first-half 2011. Other net LLAE fell $0.2 billion, or 0.1 percent, to $148.2 billion through six-months 2012 from $148.4 billion through six-months 2011.

U.S. insurers’ $12.6 billion in net LLAE from catastrophes in first-half 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 first-half 2012 from between $3 billion and $5 billion in first-half 2011.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in first-half 2012 caused $13.8 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers), down $10.6 billion compared with the $24.4 billion in direct insured losses caused by catastrophes striking the United States in first-half 2011 but one and a half times the $8.9 billion average for first-half direct catastrophe losses during the past ten years.

Reflecting the growth in premiums and the decline in LLAE, the combined ratio improved by 8.3 percentage points to 102.2 percent in first-half 2012 from 110.5 percent in first-half 2011.

“The drop in net LLAE from catastrophes is the main reason for the improvement in underwriting results in first-half 2012,” said Gordon. “If net LLAE from catastrophes remained at the same level experienced in first-half 2011, the combined ratio would have improved by only 2.3 percentage points to 108.2 percent instead of improving by 8.3 percentage points.”

Underwriting results for first-half 2012 also benefited from $7.2 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 $7.2 billion in favorable reserve development in first-half 2012 follows $7.3 billion of favorable development in first-half 2011. Excluding development of LLAE reserves, net LLAE fell $13.3 billion, or 7.4 percent, to $168.1 billion in first-half 2012 from $181.5 billion in first-half 2011, and the combined ratio improved by 8.4 percentage points to 105.5 percent from 114 percent.

The $7 billion in net losses on underwriting in first-half 2012 amounted to 3.2 percent of the $218.9 billion in net premiums earned during the period, whereas 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 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 2.3 percentage points to 184 percent for first-half 2012 from 186.3 percent for first-half 2011, their combined ratio for first-half 2012 was 82.9 percentage points worse than the 101.1 percent combined ratio for the industry excluding mortgage and financial guaranty insurers.”

Mortgage and financial guaranty insurers’ net written premiums dropped 11.7 percent to $2.3 billion for first-half 2012 from $2.6 billion for first-half 2011, and their net earned premiums fell 10.1 percent to $2.8 billion from $3.1 billion. The effects of these declines in premiums were partially offset by declines in LLAE and other underwriting expenses. Mortgage and financial guaranty insurers’ LLAE fell 6.7 percent to $4.5 billion in first-half 2012 from $4.9 billion in first-half 2011, and their other underwriting expenses dropped 35.8 percent to $0.5 billion from $0.8 billion.

Excluding mortgage and financial guaranty insurers, industry net written premiums rose 3.8 percent in first-half 2012 to $224.4 billion, net earned premiums increased 3.2 percent to $216.1 billion, LLAE fell 7.6 percent to $156.4 billion, other underwriting expenses increased 4.8 percent to $63.8 billion, and dividends to policyholders were essentially unchanged from their level in first-half 2011 at $0.8 billion. As a result, the combined ratio for the industry excluding mortgage and financial guaranty insurers improved to 101.1 percent for first-half 2012 from 109.4 percent for first-half 2011.

“Growth in overall net written premiums accelerated to 3.6 percent in first-half 2012 from 2.6 percent in first-half 2011 and 0.4 percent in first-half 2010. First-half written premiums haven’t grown this rapidly since 2004, when first-half written premiums rose 5 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, rising to 5.6 percent in first-half 2012 from 2.8 percent in first-half 2011. Net written premium growth for insurers writing mostly personal lines rose to 2.9 percent in first-half 2012 from 2.7 percent in first-half 2011, as premium growth for insurers writing more balanced books of business increased to 3 percent from 2.3 percent.”

“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 8.5 percentage points to 98.8 percent, as balanced insurers’ combined ratio improved by 8.7 percentage points to 103.4 percent and personal lines insurers’ combined ratio fell 7.8 percentage points to 101.5 percent.”

Investment Results

Insurers’ net investment income – primarily dividends from stocks and interest on bonds – fell 4.4 percent to $23.7 billion in first-half 2012 from $24.8 billion in first-half 2011. Insurers’ realized capital gains on investments in first-half 2012 dropped $1.9 billion to $1.7 billion from $3.6 billion a year earlier. Combining net investment income and realized capital gains, overall net investment gains declined $3 billion, or 10.6 percent, to $25.4 billion for first-half 2012 from $28.4 billion for first-half 2011.

“The decline in insurers’ investment income in first-half 2012 was driven by a drop in the yield on insurers’ cash and invested assets,” said Gordon. “As market interest rates declined, the yield on insurers’ average cash and invested assets dropped from 3.8 percent in first-half 2011 to 3.6 percent in first-half 2012. In addition, insurers’ average holdings of cash and invested assets declined 0.1 percent from first-half 2011 to first-half 2012.”

Combining the $1.7 billion in realized capital gains in first-half 2012 with $11.1 billion in unrealized capital gains during the same period, insurers posted $12.8 billion in overall capital gains for first-half 2012 – up $5.3 billion from $7.5 billion in overall capital gains for first-half 2011.

“Insurers’ overall capital gains for first-half 2012 reflect developments in financial markets. The New York Stock Exchange Composite rose 4.3 percent in first-half 2012, as the Dow Jones Industrial Average increased 5.4 percent, the S&P 500 rose 8.3 percent, and the NASDAQ Composite climbed 12.7 percent,” said Murray. “Insurers’ investment results would have been better if not for an increase in realized capital losses on impaired investments, which rose $0.7 billion to $1.9 billion in first-half 2012 from $1.2 billion in first-half 2011.”

Pretax Operating Income

Pretax operating income – the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income – jumped $17.1 billion to $18.4 billion for first-half 2012 from $1.3 billion for first-half 2011. The $17.1 billion increase in operating income reflects the $17.1 billion decrease in losses on underwriting, with a $1.1 billion decline in investment income offsetting a $1.1 billion increase in miscellaneous other income.

Mortgage and financial guaranty insurers’ operating income improved to negative $0.7 billion in first-half 2012 from negative $1.8 billion in first-half 2011. Excluding mortgage and financial guaranty insurers, the insurance industry’s operating income climbed $15.9 billion to $19.1 billion for first-half 2012 from $3.1 billion for first-half 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 first-half 2012 totaled $16.4 billion – up $11.7 billion from $4.8 billion for first-half 2011. The $11.7 billion increase in net income was the net result of the $17.1 billion increase in operating income, the $1.9 billion decrease in realized capital gains, and the $3.5 billion increase in federal and foreign income taxes.

Mortgage and financial guaranty insurers’ net income after taxes rose to negative $0.4 billion for first-half 2012 from negative $1.6 billion for first-half 2011. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes grew $10.5 billion to $16.9 billion for the six months ending June 30, 2012, from $6.3 billion for the six months ending June 30, 2011.

Policyholders’ Surplus

Policyholders’ surplus climbed $17.5 billion to $567.8 billion as of June 30, 2012, from $550.3 billion at year-end 2011. Additions to surplus in first-half 2012 included insurers’ $16.4 billion in net income after taxes, $11.1 billion in unrealized capital gains on investments (not included in net income), $0.7 billion in new funds paid in, and $1 billion in miscellaneous other additions to surplus. Those additions were partially offset by $11.7 billion in dividends to shareholders.

Insurers’ unrealized capital gains on investments rose to $11.1 billion in first-half 2012 from $3.9 billion in first-half 2011.

New funds paid in dropped to $0.7 billion in first-half 2012 from $1.5 billion in first-half 2011.

Miscellaneous additions to surplus grew to $1 billion in first-half 2012 from $0.1 billion in first-half 2011.

Dividends to shareholders increased $1.3 billion, or 12.4 percent, to $11.7 billion in first-half 2012 from $10.4 billion in first-half 2011.

Mortgage and financial guaranty insurers’ surplus fell to $11 billion as of June 30, 2012, from $11.4 billion at year-end 2011. Excluding mortgage and financial guaranty insurers, industry surplus rose $17.8 billion to $556.7 billion as of June 30 this year from $538.9 billion as of December 31, 2011.

“Using 12-month trailing premiums, the premium-to-surplus ratio as of June 30, 2012, was 0.78 – little changed from the 0.80 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 June 30 this year was 1.01 – 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.”

Second-Quarter Results

The property/casualty insurance industry’s consolidated net income after taxes rose to $6.3 billion in second-quarter 2012, up $9.3 billion from negative $3.1 billion in second-quarter 2011. Property/casualty insurers’ annualized rate of return on average surplus increased to 4.4 percent in second-quarter 2012 from negative 2.2 percent a year earlier.

Mortgage and financial guaranty insurers’ annualized rate of return climbed to 23.2 percent in second-quarter 2012 from negative 34.6 percent in second-quarter 2011, as their net income after taxes rose to $0.6 billion from negative $1 billion. Excluding mortgage and financial guaranty insurers, the insurance industry’s annualized rate of return increased to 4 percent in second-quarter 2012 from negative 1.5 percent in second-quarter 2011, as net income after taxes climbed to $5.6 billion from negative $2 billion.

The $6.3 billion in net income after taxes for the entire insurance industry in second-quarter 2012 was a result of $6.6 billion in pretax operating income and $1 billion in realized capital gains on investments, less $1.3 billion in federal and foreign income taxes.

The industry’s $6.6 billion in pretax operating income for second-quarter 2012 was a $13.9 billion swing from the industry’s $7.3 billion in pretax operating losses for second-quarter 2011. The industry’s second-quarter 2012 pretax operating income was a result of $6.8 billion in net losses on underwriting, $12.1 billion in net investment income, and $1.3 billion in miscellaneous other income. Excluding mortgage and financial guaranty insurers, pretax operating income for second-quarter 2012 amounted to $6.1 billion – a $12.3 billion swing from $6.3 billion in pretax operating losses for second-quarter 2011.

Net losses on underwriting shrank $12.8 billion to $6.8 billion in second-quarter 2012 from $19.6 billion in second-quarter 2011.

ISO estimates that the net LLAE from catastrophes included in private U.S. insurers’ financial results fell to $9.2 billion in second-quarter 2012 from $19.2 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 2012 totaled $10.2 billion, down $12 billion from the $22.2 billion in direct insured losses caused by catastrophes that struck the United States in second-quarter 2011, according to ISO’s PCS unit.

Second-quarter 2012 net losses on underwriting amounted to 6.1 percent of the $111 billion in premiums earned during the period. Second-quarter 2011 net losses on underwriting amounted to 18.3 percent of the $107.3 billion in premiums earned during that period.

The industry’s combined ratio improved to 105.3 percent in second-quarter 2012 from 117.6 percent in second-quarter 2011. At 105.3 percent for second-quarter 2012, the combined ratio was near the 105 percent average for the second quarter based on quarterly records extending back to 1986.

The $6.8 billion in net losses on underwriting in second-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 second-quarter 2011.

Net written premiums rose $4.6 billion, or 4.2 percent, to $114.3 billion in second-quarter 2012 from $109.7 billion in second-quarter 2011, with second-quarter net written premiums growing at their fastest rate since the 5.1 percent for second-quarter 2004.

Net earned premiums grew $3.7 billion, or 3.5 percent, to $111 billion in second-quarter 2012 from $107.3 billion in second-quarter 2011, with second-quarter net earned premiums growing at their fastest rate since the 6.8 percent for second-quarter 2004.

Excluding mortgage and financial guaranty insurers, net written premiums rose 4.3 percent in second-quarter 2012, net earned premiums rose 3.6 percent, LLAE fell 10.4 percent, and the combined ratio dropped to 104.6 percent from 116.5 percent in second-quarter 2011.

“In second-quarter 2012, the industry achieved its ninth successive quarter of growth in written premiums, following 12 quarters of declines,” said Gordon. “And earned premiums have now risen for 8 successive quarters, with the growth in earned premiums and sharp drop in catastrophe losses in second-quarter 2012 generating significant improvement in insurers’ overall results even as investment results deteriorated.”

The $12.1 billion in net investment income in second-quarter 2012 was down $0.2 billion, or 1.3 percent, compared with $12.2 billion in second-quarter 2011.

Miscellaneous other income rose to $1.3 billion in second-quarter 2012 from near nil in second-quarter 2011.

Realized capital gains on investments fell to $1 billion in second-quarter 2012 from $2.6 billion in second-quarter 2011.

Combining net investment income and realized capital gains, net investment gains dropped $1.8 billion, or 11.8 percent, to $13.1 billion in second-quarter 2012 from $14.8 billion a year earlier.

Insurers posted $2.6 billion in unrealized capital losses on investments in second-quarter 2012, with insurers’ unrealized capital gains or losses on investments in second-quarter 2011 being near nil. Combining realized and unrealized amounts, the insurance industry posted $1.6 billion in overall capital losses in second-quarter 2012 – a $4.2 billion adverse swing from the $2.7 billion in overall capital gains on investments in second-quarter 2011.

The $1.6 billion in overall capital losses for second-quarter 2012 includes $0.8 billion in realized write-downs on impaired investments, with realized write-downs on impaired securities rising from $0.5 billion in second-quarter 2011.

Sources: ISO and PCI