Read 'em and weep, folks! I couldn't help but cringe a bit as Ireviewed the P&C insurance industry's consolidated results forthe first three quarters of 2011. It was bad news galore. Even thefew bits of “good” news had a negative tinge.

Let's start with the bottom line. Net income fell by overtwo-thirds, down from $27.1 billion in the first nine months of2010 to a relatively paltry $8 billion last year. That sent theindustry's rate of return plummeting to a measly 1.9 percent,compared with a below-average but respectable 6.8 percent in2010.

How did this happen? Well, net underwriting losses, fueled bymassive catastrophe claims, ballooned nearly six times—from $6.3billion in 2010 to $34.9 billion last year. That sent the combinedratio skyrocketing from 101.2 to 109.9—the worst nine-month figuresince 2001, according to the Insurance Services Office (ISO) andthe Property Casualty Insurers Association of America (PCI), whichreports on industry-wide results each quarter.

I admit there were mitigating circumstances to consider.Unusually high catastrophe losses were clearly a prime factor inthe industry's poor showing thus far for 2011, tripling from $10.8billion through the first nine months of 2010 to a staggering $33.2billion last year. However, ISO noted that even if cat losses lastyear had been the same as they were in 2010, the combined ratiowould still have risen 1.7 points through nine months to 102.9,which is nothing to write home about.

The industry may also take some comfort from the fact that therate of return was impacted by severely negative numbers posted bymortgage and financial-guaranty carriers. Excluding those insurers,the rate of return was actually 3 percent. But that was still downconsiderably from the 7.8 percent posted in 2010—again, nothing tobrag about.

Under these conditions, it's no wonder policyholder surplus wasdrained a bit, falling $20.6 billion (3.7 percent) from year-end2010 to a still hefty $538.6 billion after nine months last year.The industry likely remains overcapitalized given the slow growthin insurable exposures, but the big question is what insurers willdo with that excess capacity.

There are additional dark clouds on the horizon. One big one isthe fact that more insurers are in the process of turning overtheir bond portfolios as their underlying holdings mature. But withinterest rates so low these days, the returns on the new bonds arenot nearly as lucrative as were the ones they are replacing.

Indeed, the effects of low interest rates are already beingfelt. Net investment income through nine months—primarily stockdividends and bond interest—was up just $1.3 billion (3.5 percent)to $36.5 billion, but it's not clear whether insurers can count oneven that high of a return going forward.

The good news (at least for sellers, but not buyers ofinsurance) is that higher prices in both commercial and personallines for many accounts boosted net written premiums by 3.1 percentover the first nine months of 2011—the highest growth rate postedsince 2006. It certainly beat 2010's 1.2 percent gain and 2009's4.6 percent decline. In addition, after excluding those nastymortgage and financial-guaranty results once again, those writingprimarily commercial lines saw premium volume rise by 3.9 percent,compared to a decline of 1.9 percent the previous year.

However, temper that with the news that thoseprimarily writing personal lines saw growth slow a bit to 3.1percent, down from 3.6 percent in 2010. And keep in mind that evenwithout the effects of catastrophes, insured losses andloss-adjustment expenses were up 5.1 percent—which means theindustry overall is still losing ground.

So where does that leave the P&C industry going into 2012?That depends on a number of factors:

• Is the nine-month surplus decline indicative of the P&Cindustry consciously burning through excess capital, or is it justthe result of a bad year of cat losses?

• Will insurers have the underwriting discipline to walk awayfrom underpriced risks or seek greater market share by competingmore aggressively on price, undermining the staying power of whathas been a firming commercial and personal lines market?

• Will insurers raise prices high enough to make up for risinglosses and weaker bond yields so they can produce a decent rate ofreturn for a change?

Of course, all bets are off if the fragile U.S. economicrecovery stalls thanks to the crises in the Eurozone, a peteringout of federal stimulus funds, cuts in state-government spending, alingering housing-market slump, a federal-government paralysis inthis election year, or any combination of these and other factorsyet to emerge.

The other major factor will be what happens with cat losses in2012. Last year may have been unusual in terms of disaster losses,but then again, given the speculation about climate change, mightthis be the “new normal” for insurers? And even though disasterclaims soared last year, outside of Hurricane Irene, we didn't havea monster storm slam into the U.S. mainland. If one should hitFlorida or the Gulf Coast (or even New York—Irene was way too closea call for someone like me living near Brooklyn's beaches),industry surplus could be drained in a hurry.

As the top insurance company chief executives and heads of themajor associations come together for their annual family reunionthis week—better known as the P&C Joint Industry Forum—it willbe interesting to hear what's on their minds. Most likely, it willbe anything but business as usual for insurers in 2012, having tocope with the threat of mounting cat exposures, decliningbond-investment returns and an uncertain economic recovery.

And a Happy New Year to you, too!