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P&C Carriers Cautiously Optimistic

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The tenor of the P&C industry’s overall health is upbeat following a financial report issued by the Insurance Services Office Inc. (ISO) and the Property Casualty Insurers Association of America (PCI).

The report states that private U.S. property/casualty insurers’ net income after taxes rose to $34.7 billion in 2010 from $28.7 billion the year before, with insurers’ rate of return on average policyholders’ surplus — a key measure of overall profitability — increasing to 6.5% from 5.9%.

Reflecting insurers’ $34.7 billion in net income and other developments in 2010, policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — rose $45.5 billion, or 8.9%, to $556.9 billion on Dec. 31, 2010, from $511.4 billion on Dec. 31, 2009. The insurers reported a 102.4% combined ratio for 2010 as opposed to 101% a year earlier.

The data released by the organizations accounts for at least 96% of all business written by private, U.S. property/casualty insurers, according to the organizations.

ISO and PCI point to the P&C industry’s net investment gains, the sum of net investment income and realized capital gains (or losses) on investments, which grew from $39.2 billion in 2009 to $52.9 billion in 2010, as contributors to the industry’s overall financial position.

The report, “Investment Gains Propelled Improvement in P/C Insurers’ Overall Financial Results for 2010 as Underwriting Results Deteriorated,” states that property/casualty insurers’ positive results for 2010 are an indication that insurers are well positioned to meet the needs of consumers and business owners as the economy recovers from the recession. Combining insurers’ $556.9 billion in policyholders’ surplus as of Dec. 31, 2010, their $557.7 billion in loss and loss adjustment expense reserves and their $199 billion in unearned premium reserves, insurers had $1.3 trillion to pay claims and meet other contingencies, said David Sampson, PCI’s president and CEO.

That said, weather forecasters are predicting an unusually active hurricane season this year, and although major natural disasters seem to be striking the United States more frequently, recent growth in policyholders’ surplus will help the insurance industry maintain its exemplary track record protecting consumers. 

In a statement, Michael Murray, ISO’s assistant VP for financial analysis, noted that growing investor expectations that the economy will continue to improve have contributed to the increase in investment gains for insurers.

And in spite of a collective growing confidence that improved financial health is contributing to further positive developments, insurers still face hurdles in underwriting, notes the report.

“Insurers continue to face substantial headwinds in their core business — underwriting — with prices yet to firm in many commercial insurance markets despite rising loss and loss adjustment expenses. Near term, economic growth may spur increases in the frequency of claims. And as the economy inches closer to full employment, inflation in the severity of claims may accelerate. But economic growth may also spur increases in demand for insurance that absorb excess capacity faster than investment gains create it. If it does, insurers can look forward to an end to the soft market, accelerating premium growth, and improvement in underwriting results. Wild cards that could hasten the turn in commercial insurance markets include catastrophes and reversals in financial markets that erase substantial amounts of insurers’ excess capacity.”

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