2011: Stormy for Insurers? - Analyst Blog

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Natural catastrophe losses experienced in 2011 are expected to be the highest for the U.S. insurance industry since 2005. For nine months ended September 2011, U.S. insurers' losses from catastrophes totaled more than $29 billion, as primary insurers suffered record breaking losses from inland thunderstorm, tornadoes, floods and Hurricane Irene.

According to the data provided by Insurance Information Institute, catastrophe losses totaled $14.1 billion in 2010 and $10.5 billion in 2009. There were 33 catastrophes in 2010, up from 27 in 2009. U.S. catastrophe losses, mostly due to tornadoes, amounted to an unprecedented $27 billion for the first half of 2011. As per the institute's estimates, 2011 is likely to become the 5 th or 6 th most expensive year in terms of insured catastrophe losses in the US.

Apart from the catastrophes, declining prior year reserve release has also strained underwriting results. In fact, favorable reserve development contributed significantly to underwriting profits over the past several years. However, during the first nine months, prior-year reserve releases fell 33% year over year to $7.7 billion.

The contribution to the bottom line from prior-year reserve releases is expected to continue to decline as the pool of redundant reserves diminishes over time, pushing the combined ratio up. This trend will contribute to higher underwriting losses in the future and eventually exert pressure on rates.

Losses Get Bigger

U.S. Property and Casualty operating performance deteriorated sharply in 2011, owing to unprecedented high cat losses and declining reserve release, partially offset by an increase in net investment income and premium income.

Data from the Insurance Information Institute shows that the industry recorded $10.4 billion in underwriting losses in 2010 compared with 3.0 billion in 2009. Available data shows that for the first nine months of 2011, underwriting losses were $34.9 billion, more than five times of the losses incurred during the same time period in 2010.

High underwriting losses in key business lines such as workers compensation (accounts for about 50% of U.S. commercial P&C insurance industry premium volume) caused private U.S. Property/Casualty insurers' after tax net income to decrease to $8 billion in the first nine-months of 2011 from $27.1 billion in the year-ago period.

Moreover, insurers' overall profitability (as measured by their annualized rate of return on average policyholders' surplus) dropped to 1.9% from 6.8% in the prior-year period. The combined ratio - a key measure of losses and other underwriting expenses per dollar of premium - deteriorated to 109.9% from 101.2% in the same period in 2010.

What Lies Ahead?

An above average cat loss experienced year to date and substantial stock repurchases made by insurers in the recent quarters have left them with relatively lower capital levels (policyholders' surplus totaled $538.6 billion as of September 30, 2011, down 4%, from $564.7 as of March 31, 2011), setting the stage for an appropriate environment to effect price increases.

Recently, the Risk Management Society ("RIMS") reported that prices for most lines of commercial insurance in the United States have begun to rise for the first time since 2003. While pricing in personal lines (which account for approximately half of all premiums written) has been trending positive for several years, and is likely to continue into 2012; commercial lines have remained in negative territory since 2004.

Recent industry data from Council of Insurance Agents and Brokers ("CIAB" ) shows that commercial P&C pricing increased 1% year over year on average in third quarter of 2011, versus flat prices in second quarter of 2011 and a 3% decline in first quarter 2011. This broad-based pricing improvement (across all lines) is primarily being led by workers compensation.

Commentary by a host of carriers, during the third quarter conference call, reflects that they are optimistic in their outlook for pricing. John D. Finnegan, of the Chubb Corp. ( CB ) was heard saying that the company's standard commercial business saw a rate increase of 4% during the quarter, while maintaining strong retention levels.

Management at XL Groupplc ( XL ) also said that rates accelerated each month in the third quarter and they believe this trend will continue into the fourth quarter and 2012.

ACE Ltd. ( ACE ) saw P&C rate increases across the board in the U.S. (except professional lines) and September price increases were the highest so far in 2011. It also said that International P&C rates were softer than U.S. rates.

In Conclusion

Effectively, property and casualty insurance pricing is in positive territory. The stage is set for further improvements in pricing as low investment yields, rising property reinsurance costs and stabilizing industry capital positions will make it difficult for the insurers to continue pricing the business below cost. Going forward, firming up of the pricing environment would be the only way to support insurers' bottom line.

CHUBB CORP ( CB ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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