After a Rough 2011 for P&C, KBW
Reports a Positive Kickoff to 2012
is the beginning of a sequence of declines
whereby excess capital is expunged from
[P&C] insurer balance sheets as core
underwriting losses mount and the ability to
release prior-year reserves into the earnings
stream diminishes,” hartwig comments in a
BY CHAD HEMENWAY
The U.S. P&C industry in 2011 posted its worst combined ratio since 2001— and net income dropped more than
45 percent, according to a joint analysis
conducted by three industry groups. But a
separate report points to more
profitable results in Q1 2012.
In 2011, the industry’s net
income was $19.15 billion,
compared to $35.2 billion in
2010, according to an analysis
by ISO, the Property Casualty
Insurers Association of America
(PCI) and the Insurance
Information Institute (I.I.I.).
Net-underwriting losses more than
tripled to $36.5 billion from $10.5 billion,
driving a 108.2 combined ratio.
“Poor underwriting results are particularly
problematic in the current environment
because of the toll that long-term declines in
interest rates and investment leverage have
taken on insurers’ ability to use investment
earnings to balance underwriting losses,” says
Michael R. Murray, assistant vice president for
financial analysis at ISO.
Catastrophe losses are primarily to blame
for the underwriting losses. U.S. catastrophes
caused $33.6 billion in direct-insured losses
to all insurers before reinsurance recoveries,
the analysis states. The losses are $19.3
billion more than in 2010, and $17.5 billion
more than the 20-year average through
2011, according to ISO’s Property Claim
Coupled with an inability to use
investment gains to offset underwriting
losses, the P&C industry posted a
3.5-percent rate of return for 2011.
I.I.I. President Robert hartwig says it was
surprising to see how little surplus declined
overall: Surplus was $550.3 billion at year’s
end, down just 1.6 percent from $556.9
billion at the end of 2010.
“One outstanding question is whether
the decline in surplus last year was a
transient occurrence, caused chiefly by
surging catastrophe losses, or whether it
One outstanding question is whether the
decline in surplus last year was a transient
occurrence, caused chiefly by surging catastrophe
losses, or whether it is the beginning of a sequence
of declines whereby excess capital is expunged
from [P&C] insurer balance sheets.”
Robert Hartwig, President, Insurance Information Institute
separate paper on industry results.
“The former seems to be the more likely
case,” he adds, noting that results in 2011
would have been much worse had it not
been for prior-year reserve releases.
Reserve releases increased to $11 billion
in 2011 compared to $9.7 billion in 2010.
Surplus was down 4.6 percent at the
end of the third quarter, but industry
results during the last three months of
2011 recouped much of the decline.
Premium-to-surplus and loss-and-adjustment-expense-to-surplus leverage
ratios are favorable.
“To the extent that these leverage ratios
shed light on the amount of risk supported
by each dollar of surplus, insurers appear to
be extremely well capitalized at this point,”
says Murray, adding the indicators “suggest
that excess capacity in competitive markets
may continue to limit rate increases and
premium growth absent a significant
capital event such as a major catastrophe
or downturn in financial markets.”
In the fourth quarter of 2011, the
industry benefited from an increase in
premium growth. hartwig says premium
growth is on a sustained upward trajectory
and could accelerate.
Net-written premiums in 2011 increased
3. 3 percent from 2010. On a quarterly basis,
premium growth has been positive since
Looking forward to Q1 2012, global-investment bank Keefe, Bruyette and Woods
(KBW) says in a report that it is raising its
earnings-per-share estimates for many of the
insurers and brokers it follows, noting that
lower catastrophe losses are expected.
“The financial impact
of catastrophes appears
to have been relatively
mild” in the first quarter,
KBW says. Plus, many
reserves during Q4 2011
for catastrophes last year,
so the firm expects “little
noise from prior events.”
Rates are up in the mid-to-high single
digits in U.S. commercial and low double
digits in U.S. reinsurance sectors, KBW
says. Increases are also seen in places that
experienced larges losses in 2011, with flat
rates to slight increases across most other lines.
however, benefits from reserve releases
could decline in the first quarter, and low
investment yields are ongoing, KBW adds.
For personal lines, rate increases in
the 5-7 percent range are being seen in
homeowner’s. Increases are in the 2-3
percent range for auto, and KBW expects a
premium growth rate of 5-7 percent.
KBW says earnings for Bermuda
reinsurers will be aided by favorable
renewals at Jan. 1, and there were few
costly first-quarter catastrophes.
Turning to regional agencies and specialty
carriers, KBW expects pricing commentary
during first-quarter conference calls to be
positive but is uncertain that rate increases
will show up in reported premium growth. NU
NUMBER OF THE WEEK:
The speed reached from zero in
one second by FM Global’s 10x10-
foot earthquake-shake table at the
insurer’s Global Research Campus
in Rhode Island. See p. 14