NU Online News Service, July 28, 2:41 p.m.EDT

Insurers were able to breathe a “collective sigh of relief” in2012's first quarter, as a dramatic drop in catastrophe losseshelped the industry realize “much needed improvement inprofitability,” says the Insurance Information Institute'spresident.

U.S. property and casualty insurers' net income improved by 29percent for the first quarter of this year, according to theInsurance Services Office, the Property Casualty InsurersAssociation of America and I.I.I., which issued their assessment of the first quarter consolidatedresults for at least 96 percent of all business written byprivate U.S. P&C insurers.

Net income rose by $2.3 billion in the quarter, from $7.8billion in the first quarter of 2011 to $10.1 billion this year.Insurers overall profitability measured by their rate of return onaverage policyholders' surplus rose 7.2 percent from 5.6percent.

The report says that driving the increase was a $4.3 billiondrop in net losses on underwriting, from $4.5 billion in 2011'sfirst quarter to $200 million in the first quarter of 2012.

“Insurers breathed a collective sigh of relief in the firstquarter of 2012 as catastrophe losses fell by nearly one-half,driving a sharp improvement in underwriting performance, whichresulted in a substantial, very welcome and much needed improvementin profitability,” says Robert Hartwig, president of theI.I.I.

Net losses and loss adjustment expense from catastrophes fell to$3.4 billion in the first quarter from $6.6 billion for the sameperiod last year.

The combined ratio improved 4.3 points, dropping from 103.3 to99.

Policyholder surplus saw a gain of $20.4 billion over the firstquart of last year to a record high of $570.7 billion in thequarter, the report says.

Robert Gordon, PCI's senior vice president for policy anddevelopment and research, commenting on the policyholder surplus,says it “is a testament to the resilience of property [and]casualty insurers throughout the financial crisis and the strengthand safety of our commitment to policyholders.”

Noting the lower combined ratio, Michael R. Murray, assistantvice president for financial analysis for ISO, says, “Theimprovement in underwriting results is especially welcome given thetoll that long-term declines in interest rates and investmentleverage have taken on insurers' ability to use investment earningsto balance underwriting losses.”

However, the report did see some negatives for the industry.

P&C industry reported a 7.2 percent annualized rate ofreturn for the quarter, affected by mortgage and financial guarantyinsurers and single-digit rates of return for other carriers.

ISO says it estimates the mortgage and financial guarantyinsurers' annualized rate of return on average surplus deterioratedto negative 38.1 percent in the first quarter a further declinefrom negative 17.7 percent in 2011.

With those carriers excluded from the results, the annualizedrate of return climbs to 8.2 percent for the industry. That is animprovement from 6.1 percent in the first quarter of 2011.

In a separate report from Conning Research & Consultingtitled “2011 Property-Casualty Loss Reserves: Another Year ofReleases, No Clear Trends 2012,” notes that 2012 industry reservesare “modestly redundant” at about 2.1 percent of carried reservesdespite releases in 2011. The reserve position “is a consequence ofmuted claims activity associated with the recent recession,” saysConning.

Conning adds that the industry released more than $11 billion inreserves in 2011.

“Overall, the industry continues to appear to have sufficientreserves, with a modest degree of safety, under assumptions thatclaim settlement patterns will continue apace,” says Conning.