P&C Insurers’ Net Income, Profitability Rises

Private U.S. P&C insurers’ net income after taxes grew to $33.5 billion in 2012 from $19.5 billion in 2011, according to data from ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI). Pretax operating income rose to $33.3 billion in 2012 from $15.4 billion in 2011. Insurers’ overall profitability as measured by their rate of return on average policyholders’ surplus climbed to 5.9 percent from 3.5 percent. While this is good news for the industry, there is cause for concern.

“As good as insurers’ results for 2012 were compared with their results for 2011, they pale in comparison with long-term norms,” said Michael Murray, ISO assistant VP for financial analysis. “For example, insurers’ 5.9-percent overall rate of return for 2012 fell far short of their 8.9-percent average rate of return for the 54 years from the start of ISO’s annual data in 1959 to 2012. Moreover, with today’s investment yields, financial leverage, and tax rates, ISO estimates underwriting profitability as measured by the combined ratio would have to improve by an additional 4.6 percentage points to 98.6 percent for insurers to earn their long-term average rate of return. Lest this seem merely academic, insurance is an essential cornerstone of commerce; and over the long term, insurers’ ability to attract the capital necessary to meet the coverage needs of an expanding economy is a function of their profitability. That is, our economic future depends on insurers being able to earn rates of return commensurate with the risks they assume.”

Net losses on underwriting dropped to $16.7 billion in 2012 from $36.2 billion in 2011, which ISO and PCI said drove the increases in insurers’ pretax operating income, net income after taxes and overall rate of return. The combined ratio improved to 103.2 percent for 2012 from 108.1 percent for 2011. ISO and PCI attribute the decline in net losses on underwriting to 4.3-percent net written and 3.4-percent net earned premium growth and a 2.8-percent drop in net losses and loss adjustment expenses (LLAE).

“Underwriting profitability improved for all three major sectors of the industry, reflecting the effects of premium growth and the drop in LLAE,” said Robert Gordon, PCI’s SVP for policy development and research. “Excluding mortgage and financial guaranty insurers, commercial lines insurers’ combined ratio dropped 2.4 percentage points in 2012 to 102.3 percent as balanced insurers’ combined ratio improved by 4.7 percentage points to 104.6 percent and personal lines insurers’ combined ratio fell 4.8 percentage points to 101.1 percent.”

The decrease in overall LLAE was largely driven by a decline in catastrophe losses, with ISO estimating that private insurers’ net LLAE from catastrophes fell $5.9 billion to $32.1 billion in 2012 from $38 billion in 2011. But other net LLAE also dropped, falling $3.7 billion, or 1.2 percent, to $302.9 billion in 2012 from $306.6 billion in 2011. U.S. insurers’ $32.1 billion in net LLAE from catastrophes in 2012 is primarily attributable to catastrophes that struck the United States.

Other year-end results include:

  • Net investment gains fell $2.3 billion to $53.9 billion in 2012 from $56.2 billion in 2011 as miscellaneous other income dropped $0.2 billion to $2.3 billion from $2.5 billion and insurers’ federal and foreign income taxes rose $3 billion to $6 billion from $3 billion.
  • Policyholders’ surplus grew $33.1 billion to a record $586.9 billion at year-end 2012 from $553.8 billion at year-end 2011 as a result of insurers’ $33.5 billion in net income after taxes.
  • Insurers’ net investment income fell 3 percent to $47.7 billion in 2012 from $49.2 billion in 2011.
  • Pretax operating income jumped $17.9 billion to $33.3 billion for 2012 from $15.4 billion for 2011.
  • Policyholders’ surplus climbed $33.1 billion to a record-high $586.9 billion as of Dec. 31, 2012, from $553.8 billion at year-end 2011.

Fourth-quarter results include:

  • The property/casualty insurance industry’s consolidated net income after taxes fell to $6.4 billion in fourth-quarter 2012, down $4.7 billion from $11.1 billion in fourth-quarter 2011.
  • Property/casualty insurers’ annualized rate of return on average surplus dropped to 4.4 percent in fourth-quarter 2012 from 8.1 percent a year earlier.
  • The industry’s $2.7 billion in pretax operating income for fourth-quarter 2012 was down $9 billion from $11.7 billion for fourth-quarter 2011.
  • For the entire industry, net losses on underwriting grew $8.5 billion to $10 billion in fourth-quarter 2012 from $1.5 billion in fourth-quarter 2011.
  • The industry’s combined ratio deteriorated to 110.4 percent in fourth-quarter 2012 from 103.3 percent in fourth-quarter 2011.

“While families and local communities continue to recover from Superstorm Sandy, the experts are already predicting that this year’s hurricane season will be very active,” Gordon said. “The horrific damage and suffering caused by Sandy serve as vivid reminders that now is the time for all of us — insurers, businesses, government officials, private citizens, and their elected representatives — to take the steps needed to minimize the economic damage and human tragedy that will occur when catastrophes strike. There is no substitute for preparation, and there is no excuse for not being prepared. Insurers’ record-high $586.9 billion in policyholders’ surplus as of December 31 attests to both insurers’ resilience in the wake of Superstorm Sandy and their ability to meet their obligations to policyholders if we’re hit again this year.”

For reprint and licensing requests for this article, click here.
Core systems
MORE FROM DIGITAL INSURANCE