Well ahead of superstorm Sandy’s wrath, private U.S. property/casualty insurers' net income after taxes grew to $27 billion in the first nine-months of 2012 from $8.4 billion in the same nine-months of 2011, with insurers' overall profitability, measured by their annualized rate of return on average policyholders' surplus, climbing to 6.3 percent from 2 percent. This is further validation that the property/casualty industry is prepared to deal with Sandy-related losses. 

As reported by to ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI), 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.

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, said the organizations.

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 improved to 100.9 percent for nine-months 2012 from 109.8 percent for nine-months 2011, according to the two organizations’ reports.

ISO and PCI attribute the improvements in underwriting results 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, said the firms.

Fitch Ratings went on record earlier this month stating it would maintain a stable outlook for both the commercial and personal lines sectors of the U.S. property/casualty insurance industry, citing the market’s capital position as strong and its industry surplus levels at historic high levels.

Fitch attributed the statement to property/casualty insurers finally benefiting from premium rate increases in nearly all major commercial and personal product lines after several years of what they classified as inadequate pricing and stern market competition. This trend is likely to continue at least through late 2013, said Fitch.

According to ISO and PCI, the underwriting results improvements 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 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.

"Results like those for nine-months 2012 provide insurers with the financial wherewithal necessary to absorb shock losses such as those inflicted by Sandy last October and continue to fulfill their commitments to policyholders," said Robert Gordon, PCI's SVP 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."

Michael Murray, ISO assistant vice president for financial analysis, issued a cautionary tone concerning yet-to-be determined final loss figures related to superstorm Sandy. "We won't know the full cost of 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 Murray. "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 organizations attributed the property/casualty industry's 6.3 percent annualized rate of return for nine-months 2012 to the net result of negative rates of return for mortgage and financial guaranty insurers and single-digit rates of return for other insurers. ISO said it 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.

For the original ISO/PCI news report, click here.

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