III: Catastrophes Took Big Bite Out of Insurers’ 2011 Profits

U.S. property and casualty insurance providers made a combined $8 billion in profits during the first nine months of 2011, a 70 percent dip from the $27.1 billion in net, after-tax income brought in during the same period last year, with industry experts blaming the decline largely on underwriting losses caused by natural disasters.

Net losses on underwriting climbed to $34.9 billion over the nine-month period, eclipsing the $6.3 billion for the first three-quarters of 2010, according to a report by ISO and the Property Casualty Insurers Association of America (PCI).

Analysts found that the poor returns are largely the result of a hike in net losses and loss adjustment expenses (LLAE) due to catastrophes, which caused $33.2 billion in LLAE from January through September. That was more than three times the $10.8 billion in those losses reported for the same time frame last year, but ISO and PCI officials said the industry remains strong.

“Despite massive net losses on underwriting, insurers emerged from nine-months 2011 strong, well-capitalized and capable of paying future claims,” Robert Gordon, PCI’s senior vice president for policy development and research, said in a news release.

The report is the latest to track the deep losses incurred by insurers this year after tornadoes, tropical storms and other severe weather events prompted a multitude of damage claims on policies for everything from cheap auto insurance in Missouri to residential and business owner coverage up and down the East Coast.

According to an analysis released earlier this money by credit-rating agency A.M. Best, catastrophic weather events from through September caused property/casualty insurers an estimated $38.6 billion in pretax, total net losses. That was nearly twice the $16.1 billion in losses inflicted during the same period last year.

The disasters included Hurricane Irene, which struck the East Coast in late August, causing an estimated $7.3 billion in insured losses, according to the National Oceanic and Atmospheric Administration.

The report supplements earlier research by ISO and PCI, which reported in October that catastrophes during the year’s first half had trimmed net income for insurers from $16.8 billion last year to just $4.8 billion this year.

Insurers’ Investment Income and Written Premiums Up

The most recent report notes some industry improvements, including $42 billion in net investment income and net realized capital gains, a $2.1 billion increase from the first three-quarters of last year. Net written premiums were $334.5 billion through September—a 3.1 percent increase over last year—and net earned premiums climbed 2.6 percent to $323.8 billion.

“While nine-month net written premium grew at the fastest rate since 2006, written premium growth continued to fall short of growth in insurers’ losses and loss adjustment expenses,” Gordon said. “Even excluding the effects of catastrophes, insurers’ losses and loss adjustment expenses rose 5.1 percent—about one and a half times as fast as premiums.”

Policyholders’ surplus dropped $20.6 billion to $538.6 billion as of Sept. 30, although that was still enough to cover 125 times the amount of direct insured losses that resulted from Irene, Gordon said.

However, the combined ratio—a measure of profitability that compares performance among multiple companies—rose to 109.9 percent for the period, up from 101.2 percent the year before.

According to Michael R. Murray, ISO’s assistance vice president for financial analysis, the combined ratio is the worst since the 114.4 percent reported in 2001.

“Even after adjusting for catastrophe losses, the latest data indicates that insurers continued to face headwinds in their core-business—underwriting,” Murray said in a news release.

ISO officials estimated that insurers’ combined ratio would have increased 1.7 percent had catastrophe losses remained the same as last year. That is troubling in light of the current low interest rates, which restrict the ability to generate investment income, according to Murray.

A study released earlier this month by Americans for Insurance Reform—a coalition of consumer advocacy groups with ties to the Center for Justice & Democracy at New York Law School—found that the bulk of insurer profits come not from underwriting, but from investment of policyholders’ premium dollars.

Coverage providers’ net investment income rose 3.5 percent to $36.5 billion for the nine-month period, and realized capital gains on investments totaled $5.5 billion, up nearly $1 billion from the same time frame last year.

About John Pirro
John Pirro is a licensed fire and casualty insurance agent specializing in various aspects of the auto insurance industry. He worked in the auto body repair industry before taking a reporting position at Online Auto Insurance News.

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