2010 Now On Target To Be A Profitable Year For P&C Insurers

The property and casualty insurance industry is on the road to showing a profit for 2010 despite a 3 percent slide in third-quarter net income, an industry report said.

The Jersey City, N.J.-based Insurance Services Office, in conjunction with the Property Casualty Insurers Association of America and the Insurance Information Institute, released the nine-month and third-quarter p&c industry results last week, saying that the industry is on the road to positive growth for the year.

For the first nine months of 2010, results showed a robust increase of 62 percent in net income.

“Property [and] casualty insurers' positive results for the nine-months 2010 show that insurers are well positioned to meet the needs of consumers and business owners as the economy recovers from the Great Recession,” said David Sampson, PCI's president and chief executive officer, in a statement.

“It is now all but certain that the p&c insurance industry will record positive growth in 2010–the first since 2006,” said Robert P. Hartwig, president of the I.I.I., in a separate statement. “While underwriting losses deteriorated marginally, the industry is still operating on a 'breakeven' basis with a combined ratio of 99.7, after excluding mortgage and financial guaranty insurers.”

“Assuming the economic recovery continues, we may see some firming in insurance markets down the road as increases in demand for insurance absorb some of the excess capacity that has weighed so heavily on many insurance markets,” said Michael R. Murray, ISO's assistant vice president for financial analysis. “But, for now, leverage ratios continue to indicate that insurers have excess capacity.”

For the third quarter, net income dropped $332 million to $10.2 billion. Net written premiums grew more than 2 percent, or $2.48 billion to $110.7 billion. Net earned premiums rose more than 1 percent, or $1.12 billion to $107.3 billion.

The combined ratio in the quarter improved 0.3 points to 100.2.

ISO said the decline in third-quarter net income resulted in a drop in p&c insurance annualized rate of return on average surplus to 7.5 percent compared to an 8.8 percent return the year before.

Overall, nine-month net income results rose $10.2 billion to $26.7 billion. Net written premiums increased less than 1 percent, or $2.4 billion to $323 billion. Net earned premiums rose close to 1 percent, or $2.9 billion to $314.4 billion.

The combined ratio for the nine months deteriorated 0.5 points to 101.2.

“Increased profitability and rising capacity through the first three quarters are primarily attributable to improved investment market conditions, stable underwriting results and a lack of mega-catastrophes,” Mr. Hartwig said.

“At the same time, persistent soft market conditions and lingering but receding effects of the deep recession continue to impact growth. While insurers remain cautious about the economy and financial market conditions, there is guarded optimism that both will continue to improve as the industry transitions into 2011.”

Among some of the other report highlights:

o ISO's Property Claim Services said catastrophes striking the United States over the first nine months caused direct insurance losses (before reinsurance recoveries) of $10.7 billion.

o Mortgage and financial guaranty insurers' net written premiums declined 14.5 percent to $4.2 billion for the nine months of 2010. Net earned premiums dropped 11 percent to $5.1 billion.

o Net investment income fell $900 million to $35 billion during the first nine months, but insurers' realized capital gains on investments grew by $14 billion, more than reversing $9.6 billion in realized losses for the first nine months in 2009.

o Over the nine months, combined net investment income and realized gains rose 50 percent to $39.5 billion from $26.3 billion from the year before.

In spite of many positive swings in individual line items on the industry aggregate financial statement, Mr. Murray highlighted a deterioration in the nine-month combined ratio–to 101.2 from 100.7–as “a particular cause for concern.”

Citing low levels of investment yields prevailing today and “the same long-term decline in investment leverage that helped insulate insurers from the ravages of the financial crisis and Great Recession,” Mr. Murray said that insurers “now need better underwriting results just to be as profitable as they once were.”

Mr. Hartwig said the combination of low interest rates and smaller dividends “are profound and immediate, because there can be no guarantee of a reversal in these trends.”

“The only guarantee is that insurers will continue to face losses from claims that are as large as or larger than in the past,” he said. “The bottom line, therefore, is that insurers will need to earn more in premium through higher rates to compensate for lower investment earnings.”

The report noted that policyholder surplus increased $33.4 billion, or more than 6 percent, to $545 billion, above the pre-financial crisis level of $522 billion in 2007.

“The industry is and will remain extremely well capitalized and financially prepared to pay very large-scale losses, if necessary,” Mr. Hartwig said.

Referring to the small increase in aggregate premiums recorded through nine months, he also noted that the “nascent stabilization in premium growth comes at an important time for the industry, since it reduces the likelihood that the year will end with a fourth consecutive full year of net premiums written declines on the books. The last time that happened was during the Great Depression, he said.

Still, the continued soft market–in its seventh straight year–held back growth to a minimal level, as did current economic conditions.

Mr. Hartwig, an economist, noted that even though the nation's real (inflation-adjusted) gross domestic product actually began to expand during the second half of 2009, growth in p&c insurance exposure usually lags behind economic growth by a year or more. “This is because the early stages of economic recoveries are always led by productivity gains rather than additions to fixed investment (e.g., plants, equipment) or hiring (which would add to payrolls),” he explained.