Storms Dampen First-half Profitability

Tornadoes and hurricanes washed away a good deal of U.S. property/casualty insurers’ net income in the first-half 2011, new numbers from ISO and the Property Casualty Insurers Association of America (PCI) reveal.

Net income after taxes fell to $4.8 billion in first-half 2011, down from $16.8 billion in first-half 2010 last year. The dip was largely attributable to a series of natural disasters which caused net losses on underwriting to jump to $24.1 billion in first-half 2011, compared to the $5.1 billion recorded in first-half 2010. As such, the industry’s combined ratio deteriorated to 110.5 percent for first-half 2011 from 101.7 percent for first-half 2010.

“The 110.5 percent combined ratio for first-half 2011 is the worst six-month underwriting result since the 111.1 percent combined ratio for first-half 2001. Even after adjusting for record catastrophe losses, the latest data indicates that insurers continued to face strong headwinds in their core business — underwriting,” said Michael Murray, ISO’s assistant vice president for financial analysis. “ISO estimates that insurers’ combined ratio would have risen 1.3 percentage points to 103 percent in first-half 2011 if net LLAE from catastrophes had remained the same as they were in first-half 2010. The deterioration in adjusted underwriting results is a particular cause for concern, because today’s low interest rates severely limit insurers’ ability to generate incremental investment income.”

These horrid underwriting results were somewhat ameliorated by solid investment gains, which grew $2.4 billion to $28.4 billion in first-half 2011 from $26 billion in first-half 2010.

“Despite record-setting catastrophe losses from events such as the deadly EF 5 tornado that struck Joplin, Mo., last May, insurers emerged from first-half 2011 financially sound and well able to continue providing essential financial protection to consumers and businesses alike — a quiet but important testament to insurers’ enterprise risk management and the effectiveness of state solvency regulation,” said David Sampson, PCI’s president and CEO. “As of June 30, 2011, insurers had $559.1 billion in policyholders’ surplus to cover new claims and meet other contingencies — more than 150 times all direct insured losses to U.S. property from Hurricane Irene. The industry is strong, well-capitalized and capable of paying claims.”

Another welcome sign was that net written premium exhibited the fastest growth rate recorded over the past five years.

“Growth in net written premiums accelerated to 2.6 percent in first-half 2011 from 0.4 percent in first-half 2010 and negative 4.4 percent in first-half 2009. But results varied significantly by sector,” Murray said. “Excluding mortgage and financial guaranty insurers, net written premium growth for insurers writing predominantly commercial lines climbed to 2.9 percent in first-half 2011 from negative 3.1 percent in first-half 2010. Conversely, premium growth for insurers writing mostly personal lines slowed to 2.7 percent from 3.5 percent. Net written premium growth for insurers writing more balanced books of business increased to 2.2 percent in first-half 2011 from 1.7 percent in first-half 2010.”

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