FSOC: Cats Hurting P&C Profitability, but Capital Levels in Good Shape

NU Online News Service, July 24, 3:01 p.m. EDT

Property and casualty insurers are facing catastrophe losses that are at an historic high, which is impeding profitability and growth, but capital levels remain healthy the Financial Stability Oversight Council says in a new report.

The report says catastrophe losses in 2011 were $33.6 billion, 135 percent higher than in 2010, and exceeded only by the extraordinary losses sustained in 2005. 

On a brighter note, despite a substantial net decline in income in 2011, capital levels within the insurance industry improved, according to FSOC. 

Despite the high claims and a 46 percent decline in net income from 2010 to 2011, book capital levels were largely unchanged, according to the report, which was filed as part of a Dodd-Frank financial services reform law requirement.

The report paints a far brighter picture overall for P&C insurers than it does for life insurers, but makes clear that there are clouds on the horizon.

Regarding life insurers, the report says that the current low interest-rate environment poses a “significant challenge” for life insurers who have sizable blocks of liabilities with promised interest-rate guarantees found in annuities or universal life insurance policies.

In general, the FSOC report notes that while direct exposures of U.S. financial institutions to the most-stressed Euro-area countries appear to be low, U.S. banks, money market funds and the insurance industry have indirect exposures through other non-periphery countries and through asset markets. 

“This generates heightened uncertainty about the extent to which evolving conditions could spill over to U.S. markets and institutions,” the report said.