The insurance industry lost money on underwriting in 2012 and its rate of return of 5.9 percent fell far short of its long term average of 8.9 percent over the last 60 years.

But profitability is improving, according to ISO—a Verisk Analytics company—and the Property Casualty Insurers Association of America.

Overall industry net income in 2012 jumped more than 72 percent to $33.5 billion, compared to 2011.

The insurance industry (the analysis looks at private P&C insurers making up 96 percent of the business in the U.S.) took an underwriting loss of $16.7 billion in 2012—which is 54 percent less than the loss of $36.2 billion in book in 2011.

Net losses and loss-adjustment expenses (LLAE) declined about $9.7 billion to $335 billion in 2012.

These two factors worked to improve the industry's yearly combined ratio—which was still an unprofitable 103.2, but better than 108.1 percent in 2011.

One might think a reduction in catastrophe losses played a role in improved results but that was not the case in 2012.

In fact, according to Robert Hartwig, president of the Insurance Information Institute, the $35 billion in catastrophe losses absorbed by the industry in 2012 was the fourth-highest total on record on an inflation-adjusted basis.

But the good news is net written premiums jumped about 4.3 percent, compared to the prior year, to $457 billion in 2012.

Hartwig's commentary calls this the best growth performance in the post-recession era, and the 4.8 percent increase in net premiums written by the industry during 2012's fourth quarter was the second-highest gain over the last six years. Exposures are on the rise as well—a sign of the economic rebound, he adds.

“With auto, home and major commercial lines all trending positively [in terms of rate], overall industry growth is poised to outpace overall economic growth once again in 2013,” Hartwig says.

And though catastrophe losses in 2011 in large part shrank industry policyholders' surplus by 4.6 percent, catastrophe losses did not have the same effect in 2012. The industry recouped the losses from the prior year and booked a record-high policyholders' surplus of $586.9 in 2012.

Robert Gordon, senior vice president for policy development and research for PCI, says the surplus “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.”

The apparent industry focus on underwriting is somewhat combating an environment of low interest rates and investment yields. However, underwriting profitability—as measured by the combined ratio—would need to improve another 4.6 points to 98.6 for insurers to earn the long-term average rate of return, says Michael R. Murray, ISO's assistant vice president for financial analysis.

Special Reports /

Industry Underwriting Results Improve; 2012 Net Income Up 72.3%

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