P/C Insurers’ Profits Jump as Catastrophe Losses Drop

U.S. property/casualty insurers’ net income after taxes jumped to $16.4 billion in first-half 2012 from $4.8 billion in first-half 2011, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus climbing to 5.9 percent from 1.7 percent.

Insurers’ pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — rose to $18.4 billion in first-half 2012 from $1.3 billion in first-half 2011.

Improvement in underwriting results drove the increases in insurers’ pretax operating income, net income after taxes, and rate of return, with net losses on underwriting dropping to $7 billion in first-half 2012 from $24.1 billion in first-half 2011. The combined ratio improved to 102.2 percent for first-half 2012 from 110.5 percent for first-half 2011, ISO and the Property Casualty Insurers Association of America said.

The improvement in underwriting results is largely attributable to a drop in net losses and loss adjustment expenses (LLAE) from catastrophes. ISO estimates that insurers’ net LLAE from cats in first-half 2012 totaled $12.6 billion, down from $25.7 billion in first-half 2011. These amounts exclude LLAE that emerged after insurers closed their books for each period but do include late-emerging LLAE from events in prior periods.

The figures are consolidated estimates for all private P/C insurers based on reports accounting for at least 96 percent of all business written by private U.S. property/casualty insurers.

Underwriting Results

Net losses on underwriting fell $17.1 billion to $7 billion in first-half 2012 from $24.1 billion in first-half 2011.

Net written premiums rose $7.9 billion, or 3.6 percent, to $226.7 billion for first-half 2012 from $218.8 billion for first-half 2011. Net earned premiums rose $6.5 billion, or 3 percent, to $218.9 billion from $212.5 billion.

Net LLAE (after reinsurance recoveries) dropped $13.3 billion, or 7.6 percent, to $160.9 billion in first-half 2012 from $174.2 billion in first-half 2011.

Other underwriting expenses — acquisition expenses; expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — increased $2.7 billion, or 4.3 percent, to $64.3 billion in first-half 2012 from $61.6 billion in first-half 2011.

Underwriting results for first-half 2012 benefited from $7.2 billion in favorable development of LLAE reserves based on new information and updated estimates for the cost of old claims from prior accident years. The $7.2 billion in favorable reserve development in first-half 2012 follows $7.3 billion of favorable development in first-half 2011. Excluding development of LLAE reserves, net LLAE fell $13.3 billion, or 7.4 percent, to $168.1 billion in first-half 2012 from $181.5 billion in first-half 2011. The combined ratio improved by 8.4 percentage points to 105.5 percent from 114 percent.

The $7 billion in net losses on underwriting in first-half 2012 amounted to 3.2 percent of the $218.9 billion in net premiums earned during the period. The $24.1 billion in net losses on underwriting in first-half 2011 amounted to 11.3 percent of the $212.5 billion in net premiums earned during that period.