P&C Q1 Net Income Drops; Net Underwriting Loss Grows

Net losses on underwriting growth to $4.5 billion in first-quarter 2011 from $1.8 billion in first-quarter 2010 contributed to the declines in private U.S. P&C insurers’ net income after taxes and overall rate of return, according to a joint announcement by ISO  , the Insurance Information Institute (I.I.I.) and the Property Casualty Insurers Association of America (PCI).

Net income dropped to $7.8 billion in first-quarter 2011 from $8.9 billion in first-quarter 2010, with insurers’ annualized rate of return on average policyholders’ surplus decreasing to 5.6% from 6.8%.

Policyholders’ surplus rose $7.8 billion, or 1.4%, to a record $564.7 billion at March 31, 2011, from $556.9 billion at Dec. 31, 2010. The combined ratio deteriorated to 103.3% in first-quarter 2011 from 101.1% in first-quarter 2010.

Partially offsetting the deterioration in underwriting results, net investment gains grew $1 billion to $13.5 billion in first-quarter 2011 from $12.6 billion in first-quarter 2010. In addition, miscellaneous other income rose $0.1 billion to $0.5 billion in the first quarter of 2011 from $0.4 billion in the first quarter of 2010, and insurers’ federal and foreign income taxes dropped $0.5 billion to $1.8 billion from $2.3 billion.

“While the declines in property/casualty insurers’ net income and return on surplus in first-quarter 2011 may be bad news for insurance companies, overall surplus rose to a record high and consumers can rest assured that insurers have the financial resources necessary to cover claims even if this year’s hurricane season is as bad as the experts predict,” says David Sampson, PCI’s president and CEO. “Combining insurers’ record $564.7 billion in policyholders’ surplus, their $560.8 billion in loss and loss adjustment expense reserves, and their $202.7 billion in unearned premium reserves as of March 31, 2011, insurers had $1.3 trillion to pay claims and meet other contingencies. Nonetheless, the devastatingly deadly EF5 tornado that struck Joplin, Mo., last month and other tragic events around the globe, such as the monstrous earthquake and tsunami that struck northeast Japan in March, should serve as vivid reminders that catastrophes can strike anywhere at any moment. Moreover, one well-respected team of forecasters has warned that the probability of the United States being struck by one or more major hurricanes this year is greater than 70%, far higher than the 52% average for the last century.”

The property/casualty insurance industry’s 5.6% annualized rate of return for first-quarter 2011 was the net result of a negative rate of return for mortgage and financial guaranty insurers and a single-digit rate of return for other insurers. ISO estimates that mortgage and financial guaranty insurers’ rate of return on average surplus for first-quarter 2011 was negative 17.7%, up from negative 66% for first-quarter 2010. Excluding mortgage and financial guaranty insurers, the industry’s rate of return dropped to 6.1% for first-quarter 2011 from 8.3% for first-quarter 2010.

“With mounting net losses on underwriting driving the decline in insurers’ net income and overall profitability in first-quarter 2011, there’s no denying that insurers continued to face substantial headwinds in their core business, underwriting. While there were some positive developments that bode well, there have also been some negative developments that suggest insurers’ results will get worse,” says Michael Murray, ISO’s AVP for financial analysis. “On the plus side of the ledger, net written premiums rose for the fourth consecutive quarter, with net written premiums rising in first-quarter 2011 by the largest amount since third-quarter 2006. On the negative side, PCS data as of June 20 shows that catastrophes striking the United States in second-quarter 2011 had already caused $14.7 billion in direct insured losses to property, more than double the $6.4 billion in direct insured losses from all the catastrophes that occurred in second-quarter 2010, and we know that second-quarter 2011 catastrophe losses will rise further when losses from four recent events are added to the tally. Moreover, increases in stock markets helped fuel insurers’ capital gains on investments in first-quarter 2011. But from March 31 to June 20, the Dow Jones Industrial Average fell 1.9%, the S&P 500 fell 3.6%, the New York Stock Exchange Composite fell 4.4%, and the NASDAQ Composite fell 5.4%, suggesting that insurers’ results for second-quarter 2011 may well suffer from capital losses on investments. Yet these near-term negatives could have positive implications farther down the road to the extent that they erase some of insurers’ excess capacity and thereby hasten a turn in the insurance pricing cycle.”

 

 

 

 

 

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