NU Online News Service, June 24, 12:41 p.m. EST

Although the property and casualty industry turned in a “mixed performance” for the 2011 first quarter, fundamentally it remains “quite strong financially,” according to an analysis of results by I.I.I. President Robert Hartwig.

Hartwig, commenting on a report of industry financial results distributed by ISO, the Insurance Information Institute, and the Property Casualty Insurers Association of America, notes that profitability declined and underwriting performance deteriorated further, but he adds that a positive development is premium growth seems to be on a “sustained upward trajectory,” rising for four consecutive quarters.

“Yet the outlook for the remainder of the year is a cautious one given exceedingly high second-quarter catastrophe losses, the prospect of high underwriting losses associated with non-cat losses and more uncertainty in the investment markets,” Hartwig says.

The ISO/I.I.I./PCI report states that first-quarter P&C net income dropped to $7.8 billion from $8.9 billion a year ago. Net written premiums increased 3.5 percent to $108.6 billion, but insurers saw $4.5 billion in underwriting losses. The industry’s combined ratio rose to 103.3, compared to 101.1 during the 2010 first quarter.

Hartwig notes that insurance demand has stabilized, after deteriorating during the recession, but he acknowledges the continuing underwriting losses. “Ironically, premium starved insurers potentially find themselves with their best growth opportunities in five years, but in an underwriting environment that is potentially worse than any experienced in nearly 10 years,” he says.

He also points out that the first-quarter decline in profitability has nothing to do with the recent U.S. storms, as those losses, expected to total $15 billion, will be recorded on second-quarter results. “However,” Hartwig continues, “some $2 billion to $5 billion in loss and loss adjustment expense...did wind up on the books of U.S. insurers that cover, reinsure or otherwise assume risk from catastrophic events abroad, including the March 11 Japanese earthquake and tsunami, the Feb. 22 new Zealand earthquake and severe flooding in Australia in January and February.”

The report points to record levels of surplus in the industry, totaling $564.7 billion, as of March 31, 2011. While that surplus is expected to shrink, Hartwig says, “Irrespective of the prospect of shrinkage in policyholders’ surplus in 2011 following a first-quarter peak, the bottom line is that the industry is and will remain extremely well capitalized and financially prepared to pay very large-scale losses, as necessary.”

For overall profits though, Hartwig says the recovery is “on hiatus.” Since the economic recovery began, Hartwig says insurer profits have rebounded steadily, driven by a recovery in asset prices, fairly subdued claim frequency and severity trends, and prior-year reserve releases.

“Approaching mid-2011,” Hartwig says, “all three of these factors seem less capable of turbo-charging the bottom line than in the recent past. Higher catastrophe losses add another headwind.”

He adds, “For the industry to match its mid-year 2010 performance, return on average surplus would need to rise to 6.7 percent with net income of $16.5 billion—impossible given the second quarter’s financial market performance and surging catastrophe losses.”

Hartwig says P&C insurers could see a rebound in profits in the 2011 second half, but only if predictions of an active hurricane season do not pan out.

Special Reports /

Hartwig: Industry Strong Financially, but Profitability a Challenge

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