Insurer Financial Results: 2010

Executive Summary

The U.S. property/casualty insurance industry’s net income after taxes rose to $34.7 billion in 2010 from $28.7 billion the year before. The industry’s overall profitability, as measured by its GAAP rate of return on average net worth (RONW), increased to 5.6% last year from 5.0% in 2009.[1]1. This study defines the U.S. property/casualty insurance industry as all private property/casualty insurers domiciled in the United States, including excess and surplus insurers and domestic insurers owned by foreign parents but excluding state funds for workers compensation and other residual-market insurers. Throughout the study, the terms "insurers" and "industry" refer to property/casualty insurers and the property/casualty insurance industry, unless otherwise stated. The data in this report is based mainly on insurers' statutory financial statements as supplied to ISO by April 1, 2011, and excludes foreign subsidiaries of U.S. insurance groups. All figures are net of reinsurance unless otherwise noted and may not balance because of rounding. But the industry’s recovery from the Great Recession and financial crisis remained incomplete, with the industry’s $34.7 billion in net income for 2010 being just over half of its $62.5 billion in net income for 2007. Similarly, the industry’s 5.6% GAAP RONW for last year was just over half of its 10.9% GAAP RONW for 2007.[2]2. GAAP stands for Generally Accepted Accounting Principles, the accounting basis used by most industries. Unless otherwise stated, the figures in this report are based on Statutory Accounting Principles (SAP), the accounting basis used by insurers when preparing the annual statements they submit to state regulators. See Appendix C starting on page 88 for a discussion of the major differences between GAAP and SAP.

Though insurers’ income and rate of return have yet to regain the levels reached in 2007, policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — rose to a new record high in 2010. At $556.9 billion at year-end 2010, surplus was up $45.5 billion, or 8.9%, from $511.4 billion at year-end 2009. Key leverage ratios, such as the premium-to-surplus ratio, suggest that insurers were strongly capitalized. At year-end 2010, the ratio of premiums to surplus was a record-low 0.76, down from 0.82 at year-end 2009 and only about half the 1.53 average premium-to-surplus ratio from 1970 to 2010.[3]3. Unless otherwise specified, references to record lows and record highs for ratios and dollar values are based on data extending back to 1959. Record lows and record highs for growth rates are based on data extending back to 1960.

ISO’s analysis reveals that the increases in net income and overall profitability in 2010 were directly attributable to improvement in investment results. Net losses on underwriting increased $7.4 billion to $10.4 billion in 2010 from $3.0 billion in 2009. Net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — rose $13.8 billion, or 35.2%, to $52.9 billion in 2010 from $39.2 billion the year before.

Despite the continuing recovery in insurers’ results last year, insurers once again failed to achieve rates of return commensurate with those of firms in other industries. The Fortune 500 consists of the 500 largest industrial and service corporations in the United States. ISO estimates that, in 2010, the median GAAP RONW for the Fortune 500 was 13.6% — 8.0 percentage points more than the GAAP RONW for the insurance industry as a whole and 7.2 percentage points more than the GAAP RONW for large insurers.[4]4. ISO estimated the median GAAP rate of return on average net worth for the Fortune 500 using the median GAAP rate of return on year-end shareholders' equity published by Fortune magazine. This study classifies a property/casualty insurer as "large" if the insurer accounts for more than 0.5% of the industry's net written premium. In 2010, thirty-five large property/casualty insurers each wrote more than $2.1 billion in premiums.

Net Income and Return on Net Worth
The industry’s $34.7 billion in net income in 2010 consisted of $37.8 billion in operating income, plus $5.7 billion in realized capital gains (after taxes) on investments, less $8.9 billion in income taxes.[5]5. Throughout this report, unless stated otherwise, the phrase "income taxes" and the phrase "federal income taxes" both refer to federal and foreign income taxes as shown on the income statements included in property/casualty insurers' statutory annual statements. (See table 1.)

summary of finincial results

Operating income — the sum of net gains (losses) on underwriting, net investment income, and miscellaneous other income — fell $7.1 billion, or 15.9%, in 2010, as a consequence of the $7.4 billion increase in net losses on underwriting. Net investment income rose $0.2 billion, or 0.4%, to $47.2 billion in 2010 from $47.1 billion in 2009. In addition, miscellaneous other income rose $0.1 billion to $1.0 billion in 2010 from $0.9 billion the year before.

The $5.7 billion in realized capital gains on investments in 2010 constituted a $13.6 billion swing from the $7.9 billion in realized capital losses on investments in 2009.

The industry’s net income after taxes would have increased more in 2010 if not for an increase in income taxes, which rose $0.4 billion to $8.9 billion last year from $8.4 billion in 2009.

Although the recession and credit crisis continued taking a disproportionate toll on results for mortgage and financial guaranty (M&FG) insurers, their net income after taxes rose to –$4.4 billion in 2010 from –$6.2 billion in 2009. Reflecting the increase in M&FG insurers’ net income after taxes, their statutory rate of return on average policyholders’ surplus rose to –36.6% last year from –51.7% the year before.[6]6. Statutory rates of return on average policyholders' surplus equal statutory net income for a period divided by average policyholders' surplus during the period. ISO compared statutory rates of return for mortgage and financial guaranty insurers with those of other insurers, because ISO's formula for calculating insurance industry GAAP rates of return may not be suitable for calculating GAAP rates of return for individual segments of the industry with distinct characteristics.

Excluding M&FG insurers, the industry’s net income increased $4.2 billion to $39.0 billion in 2010 from $34.8 billion in 2009, and its statutory rate of return on average policyholders’ surplus edged up to 7.5% in 2010 from 7.4% in 2009.

Further analysis reveals a long-term downward trend in insurers’ overall profitability. Using averages to smooth the effects of cycles and random shocks, the insurance industry’s average GAAP RONW fell to 6.3% in the decade ending 2010 from 8.1% in the decade ending 2000, 10.1% in the decade ending 1990, and 13.5% during the decade ending 1980.

Underwriting Results
Net written premium growth resumed in 2010, following an unprecedented three consecutive years of declines. In particular, net written premiums grew 0.9% in 2010, after dropping a record 3.8% in 2009, 1.3% in 2008, and 0.6% in 2007.[7]7. Net written premiums rose every year from 1960, when ISO's premium growth data begins, to 2006.

Analysis of data for the past forty years reveals a long-term slowing in premium growth. From 1971 to 2010, net written premiums rose an average of 6.6% per year. But written premium growth slowed to an average of 3.4% per year during the twenty years ending 2010 from 10.0% per year during the twenty years ending 1990. The long-term slowing in premium growth may have contributed to the long-term downward trend in insurers’ overall rates of return.

Analysis of economic and market data indicates that the uptick in premiums in 2010 was a result of growth in the economy and price increases for personal lines coverage. The real gross domestic product (GDP) of the United States — a broad measure of economic output — grew 2.9% in 2010. Moreover, the U.S. government Consumer Price Index (CPI) for motor vehicle insurance rose 5.1% in 2010, as the CPI for tenants’ and household insurance rose 3.5%.

But premiums on commercial renewals fell 0.2% in 2010 for all ISO MarketWatch® lines combined.[8]8. Using ISO's statistical databases, ISO MarketWatch® tracks actual premiums for policies renewed with the same terms and conditions for commercial auto liability, commercial auto physical damage, products liability, premises and operations liability, businessowners, commercial fire, and commercial allied lines, by class and statistical territory. Monthly data about the pricing of both new and renewal business from MarketScout’s Market Barometer indicates the price of commercial insurance fell an average of 4.0% in 2010, with prices falling 2.7% for small accounts, 3.8% for medium-sized accounts, 4.9% for large accounts, and 4.8% for jumbo accounts. In addition, prices declined for all fourteen coverage classes and all seven industry classes tracked by MarketScout.[9]9. For purposes of its Market Barometer, MarketScout defines small accounts as those generating up to $25,000 in premiums, medium-sized accounts as those generating from $25,001 to $250,000 in premiums, large accounts as those generating from $250,001 to $1,000,000 in premiums, and jumbo accounts as those generating more than $1,000,000 in premiums. The coverage classes for which MarketScout tracks changes in pricing are commercial property, business interruption, businessowners package policies, inland marine, general liability, umbrella/excess, commercial auto, workers compensation, professional liability, directors and officers liability, employment practices liability, fiduciary, crime, and surety. The industry classes for which MarketScout tracks changes in pricing are manufacturing, contracting, service, habitational, public entity, transportation, and energy. ISO averaged monthly values as reported by MarketScout to derive the annual values referenced in this report.

The softening in commercial insurance moderated significantly in 2010, with ISO MarketWatch data indicating that declines in premiums on commercial renewals slowed to 0.2% in 2010 from 0.6% in 2009 and 3.5% in 2008. Similarly, data from MarketScout’s Market Barometer indicates that declines in prices for new and renewal commercial business abated to 4.0% in 2010 from 6.0% in 2009, 11.1% in 2008, and 13.3% in 2007. While forecasting turns in insurance markets is notoriously difficult, these developments are what one would expect to see as prices in commercial insurance markets approach a bottom. Moreover, monthly data from ISO MarketWatch shows that renewal premiums in December 2010 exceeded renewal premiums in December 2009 for five of the seven ISO MarketWatch lines — commercial auto physical damage, products liability, premises and operations liability, businessowners, and commercial property allied lines.

With underwriting gains (or losses) equaling earned premiums minus net loss and loss adjustment expenses (LLAE), other underwriting expenses, and dividends to policyholders, net losses on underwriting grew $7.4 billion to $10.4 billion in 2010, because earned premiums fell as LLAE, underwriting expenses, and dividends to policyholders rose.

Net earned premiums fell for the third consecutive year, declining 0.4% in 2010 after falling a record 3.7% in 2009 and 0.1% in 2008. These declines in earned premiums were the first since 1960, when ISO’s premium growth records begin.

LLAE increased $2.8 billion, or 0.9%, to $309.1 billion in 2010 from $306.3 billion in 2009. The increase in overall LLAE is attribut­able to an increase in U.S. catastrophe LLAE. ISO estimates that the net U.S. catastrophe LLAE included in private insurers’ financial results increased to $14.7 billion for 2010 from $11.6 billion for 2009. Excluding catastrophe LLAE, net LLAE decreased $0.2 billion to $294.4 billion for 2010 from $294.7 billion for 2009.

According to ISO’s Property Claim Services® (PCS®) unit, catastrophes striking the United States in 2010 caused $14.1 billion in direct insured losses (before reinsurance recoveries) — up $3.6 billion from $10.5 billion in 2009.[10]10. The PCS® data about direct catastrophe losses is based on information available through May 16, 2011, and is subject to change as more information about the cost of settling claims from past catastrophes becomes available. The data for direct insured losses from catastrophes is on an accident-year basis, excludes loss adjustment expenses, and is for all insurers, including residual-market insurers as well as foreign insurers and reinsurers. Direct catastrophe losses as cited in this study may differ from those published elsewhere because, for purposes of the analysis, ISO defined catastrophic events as those causing direct losses in excess of an inflation-adjusted dollar threshold equivalent to $25 million in 1997 and excluded events causing losses below the threshold.

Also contributing to growth in overall LLAE last year, newly incurred environmental and asbestos (E&A) LLAE on policies written long ago rose to $3.1 billion in 2010 from $2.5 billion in 2009.

Incurred LLAE would have risen more in 2010 if not for changes in the adequacy of insurers’ LLAE reserves. Excluding reserves for claims associated with past catastrophes and reserves for E&A claims, ISO estimates that reserve adequacy deteriorated by between $9.3 billion and $16.3 billion in 2010, after deteriorating by between $4.9 billion and $11.9 billion in 2009. Using the midpoints of those ranges, changes in the amount of deterioration in LLAE reserves reduced growth in incurred LLAE by $4.4 billion in 2010. That is, incurred LLAE would have increased $7.2 billion in 2010, instead of $2.8 billion, if the amount of deterioration in LLAE reserve adequacy in 2010 had equaled the amount of deterioration in reserve adequacy in 2009.

The LLAE incurred by M&FG insurers fell $2.0 billion to $11.7 billion in 2010 from $13.7 billion in 2009. Excluding M&FG insurers, industry LLAE increased $4.8 billion, or 1.7%, in 2010.

Other underwriting expenses — primarily acquisition expenses; other expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — increased $2.5 billion, or 2.2%, to $119.6 billion in 2010 from $117.0 billion in 2009. To the extent that commissions, premium taxes, and related expenses are proportionate to premiums, the increase in underwriting expenses reflects the 0.9% increase in net written premiums.

Dividends to policyholders in 2010 increased to $2.3 billion, up 14.4% from $2.0 billion in 2009.

The combined ratio — a key measure of losses and expenses per dollar of premium — increased to 102.4% in 2010 from 101.0% in 2009. Though the 102.4% combined ratio for 2010 was 2.6 percentage points lower than the average combined ratio for the forty years from 1971 to 2010, lower investment yields and financial leverage mean that combined ratios must now be better than they were in the past for insurers to achieve the same level of overall profitability they once did. For example, the industry’s 5.6% GAAP RONW for 2010 was 9.5 percentage points less than its 15.0% GAAP RONW for 1986, even though the 102.4% combined ratio for 2010 was 5.7 percentage points better than the 108.1% combined ratio for 1986.

M&FG insurers’ combined ratio worsened to 194.4% in 2010 from 191.8% in 2009. Excluding M&FG insurers, the industry’s combined ratio increased to 100.8% last year from 99.3% in 2009.

Additional ISO analyses indicate that abnormal catastrophe losses, E&A losses, and changes in the adequacy of reserves for other losses also affected the industry’s combined ratio for 2010. If not for abnormal catastrophe losses, E&A LLAE, changes in the adequacy of reserves for other LLAE, and results for M&FG insurers last year, the industry’s combined ratio would have risen 1.8 percentage points in 2010 to 101.8% from 100.0% in 2009, instead of rising 1.4 percentage points to 102.4% from 101.0%.[11]11. For further information about the individual effects of abnormal catastrophe losses, E&A LLAE, changes in reserve adequacy, and M&FG insurers' results on combined ratios for the industry, see the analysis starting on page 24. When calculating adjusted combined ratios, ISO smoothed catastrophe losses, excluded E&A LLAE as defined for purposes of the notes to financial statements included in the statutory annual statements insurers file with state regulators, restated other losses to eliminate changes in reserve adequacy, and excluded results for M&FG insurers.

Adjusted for abnormal catastrophe losses, E&A LLAE, changes in reserve adequacy, and M&FG insurers’ results, the combined ratio averaged 99.1% from 2000 to 2010 — 3.5 percentage points less than the 102.6% average combined ratio based on reported results. That is, the combined net effect of abnormal catastrophe losses, E&A LLAE, changes in reserve adequacy, and M&FG insurers’ results from 2000 to 2010 was to raise the combined ratio by an average of 3.5 percentage points. But the net effect of these factors has varied by year. For example, the net effect in 2000 was to reduce the industry’s combined ratio by 11.4 percentage points, but the net effect in 2005 was to raise it by 13.7 percentage points.

Investment Income
Net investment income increased $0.2 billion to $47.2 billion in 2010 from $47.1 billion in 2009. The $0.2 billion increase is a result of $1.3 billion in net investment income one insurer received from a newly acquired noninsurance business, with the insurer using new funds (capital) from its parent to finance that acquisition. Mathematically, insurers’ invest­ment income is determined by the amount of insurers’ cash and invested assets and by the yield on those assets. In 2010, investment income increased 0.4%, as insurers’ average holdings of cash and invested assets grew 4.6% and the investment income yield on insurers’ average holdings of cash and invested assets declined to 3.7% from 3.9%. In turn, the decline in the yield on cash and invested assets reflects trends in interest rates, with the yield on ten-year Treasury notes receding to an average of 3.2% in 2010 from 3.3% the year before.

Further analysis reveals a long-term slowing in the growth of investment income, with the average annual rate of growth in investment income declining to 1.8% during the twenty years ending 2010 from 15.1% during the twenty years ending 1990. The long-term slowing in the growth of investment income reflects trends in insurers’ holdings of cash and invested assets. From 1991 to 2010, insurers’ average holdings of cash and invested assets rose an average of 5.2% per year — down from 11.9% per year during the previous twenty years.

The long-term slowing in the growth of investment income also mirrors trends in interest rates and associated declines in the yield on insurers’ cash and invested assets. The yield on ten-year Treasury notes averaged 5.3% during the twenty years ending 2010 — down from 9.1% during the twenty years ending 1990. The investment income yield on insurers’ cash and invested assets averaged 5.0% during the twenty years ending 2010 — down from 6.5% during the twenty years ending 1990.

Capital Gains
Combining insurers’ $5.7 billion in realized capital gains after taxes in 2010 with their $15.6 billion in unrealized capital gains after taxes, insurers posted $21.3 billion in overall capital gains after taxes last year — a $6.1 billion increase from the $15.2 billion in capital gains after taxes in 2009.

Insurers’ $21.3 billion in overall capital gains after taxes in 2010 reflects their $28.1 billion in overall capital gains before taxes, with insurers’ overall capital gains before taxes rising from $27.2 billion in 2009. In turn, the increase in overall capital gains before taxes reflects a decline in realized write-downs (losses) on impaired investments. ISO estimates that pretax write-downs on impaired investments fell $10.2 billion to $5.9 billion in 2010 from $16.1 billion in 2009.[12]12. Statutory annual statements provide only pretax values for write-downs on impaired investments.

As increases in the S&P 500 index of common stock prices slowed to 12.8% in 2010 from 23.5% in 2009, insurers’ pretax gains on common stocks dropped to 8.9% of their opening holdings in 2010 from 15.7% in 2009.

Analysis of data extending back to 1980 reveals a strong correlation between changes in the S&P 500 and insurers’ capital gains on common stocks. The S&P 500 rose in twenty-four of the thirty-one years from 1980 to 2010, and insurers posted capital gains on common stocks during each of those years. Conversely, the S&P 500 declined in seven of the thirty-one years ending 2010, and insurers posted capital losses on common stocks in six of those years. But insurers’ capital gains on common stocks have tended to fall short of increases in the S&P 500. From 1980 to 2010, the S&P 500 increased at an average annual compounded rate of 8.2%, whereas insurers’ holdings of common stocks appreciated at an average annual compounded rate of 7.5%.[13]13. ISO obtained closing prices for the S&P 500 back to 1979 from Standard & Poor's and IHS Global Insight. For purposes of this analysis, the rate of appreciation in insurers' holdings of common stocks equals the pretax capital gains on common stocks during a year divided by value of their investments in common stocks at the start of the year.

Policyholders’ Surplus and Leverage
Policyholders’ surplus rose $45.5 billion, or 8.9%, to a record $556.9 billion at year-end 2010 from $511.4 billion at year-end 2009. Additions to surplus in 2010 included $34.7 billion in net income after taxes, $15.6 billion in unrealized capital gains on investments (net of changes in deferred taxes associated with such gains), and $27.4 billion in new funds paid in. Those additions were partially offset by $31.0 billion in dividends to stockholders and $1.2 billion in miscellaneous charges against surplus. (See table 2.)

changes in policyholders' surplus

Unrealized capital gains dropped to $15.6 billion in 2010 from $23.1 billion in 2009.

The $27.4 billion in new funds paid in during 2010 was up from $6.6 billion in 2009 and is the largest amount of new funds paid in during any year since the start of ISO’s data in 1959. The record-high $27.4 billion in 2010 included $22.5 billion contributed to one insurer by its parent, as the insurer absorbed a major acquisition outside the insurance business. The previous record high for new funds was $18.8 billion in 2002.

The $1.2 billion in miscellaneous charges against surplus in 2010 contrasts with $12.6 billion in miscellaneous additions to surplus in 2009. The $1.2 billion in miscellaneous charges against surplus in 2010 is net of $4.1 billion in miscellaneous additions to surplus by M&FG insurers. Excluding M&FG insurers, miscellaneous charges against surplus amounted to $5.3 billion last year.

The $31.0 billion in dividends to stockholders in 2010 was up $14.1 billion, or 83.6%, from the $16.9 billion in 2009.

Leverage ratios, such as the premium-to-surplus ratio and the LLAE-reserves-to-surplus ratio, provide simple measures of how much risk each dollar of surplus supports. The industry’s premium-to-surplus ratio declined to a record-low 0.76 last year from 0.82 in 2009. The LLAE-reserves-to-surplus ratio also fell in 2010, decreasing to 1.00 from 1.08 in 2009 and dropping to its lowest level since the 0.97 for 1968.

Both the premium-to-surplus and LLAE-reserves-to-surplus ratios have been subject to long-term downward trends. In particular, the average premium-to-surplus ratio fell from 2.19 during the decade ending 1980 to 1.00 during the decade ending 2010. Though the average LLAE-reserves-to-surplus ratio rose from 1.73 during the decade ending 1980 to 2.00 during the decade ending 1990, it then declined to 1.16 during the decade ending 2010.

With premium-to-surplus and LLAE-reserves-to-surplus ratios now significantly lower than they were in the past, the industry’s ability to meet its financial obligations may have improved with the passage of time. But these simple leverage ratios are often misleading. To the extent that they are affected by changing prices in insurance markets and changes in reserve adequacy, the trends in these leverage ratios are imperfect indicators of changes in insurers’ financial condition. In addition, increases in replacement costs and the number of properties in areas exposed to hurricanes and other natural catastrophes mean that insurers must now hold more capital just to be as financially secure as they were before the buildup. Nonetheless, to the extent that the long-term declines in premium-to-surplus and LLAE-reserves-to-surplus ratios mean that insurers are now holding more capital relative to the risks they have underwritten, insurers may be using capital less efficiently than they did in the past.

The ratio of cash and invested assets to surplus provides a measure of financial leverage affecting the contribution of investment income to insurers’ overall rates of return. The ratio also provides a measure of the risk to surplus from capital losses on investments. All else being equal, the higher the ratio, the bigger the contribution of investment income to insurers’ overall rate of return. Similarly, the higher the ratio of cash and invested assets to surplus, the larger the percentage decline in surplus associated with a given volume of capital losses on investments.

Since hitting a record-high 4.27 in 1974, the ratio of cash and invested assets to surplus has been trending downward. The average ratio of cash and invested assets to surplus fell to 2.58 in the decade ending 2010 from 2.83 in the decade ending 2000, 3.36 in the decade ending 1990, and 3.58 in the decade ending 1980. The decline in investment leverage since the mid-1970s and the long-term downward trend in investment income yields have reduced the contribution of investment income to insurers’ overall rates of return. However, the decline in the ratio of cash and invested assets to surplus has also reduced insurers’ risk of insolvency consequent to capital losses on investments.

Operating Cash Flow
Operating cash flow (OCF) indicates the rate at which basic underwriting and investment operations generate cash to fund new investments, dividend payments to stockholders, or other activities.[14]14. Operating cash flow is the sum of underwriting cash flow, net investment income received, and other income received, minus taxes paid.

Despite the increase in insurers’ net income last year, OCF edged down to an estimated $35.4 billion in 2010 from $35.5 billion in 2009 and $38.7 billion in 2008. At $35.4 billion last year, OCF was less than half of the record-high $89.9 billion for 2004.[15]15. ISO's OCF data extends back to 1979.

The $0.1 billion decrease in OCF last year is the net result of several offsetting developments. Net underwriting cash outflows dropped $1.3 billion to $6.8 billion in 2010 from $8.1 billion in 2009, as net investment income received rose $1.6 billion to $50.7 billion from $49.1 billion. But these positive developments were more than offset by a $1.6 billion decline in other income received to –$0.8 billion in 2010 from $0.8 billion in 2009 and a $1.4 billion increase in income taxes paid (a cash outflow) to $7.7 billion last year from $6.3 billion the year before.

OCF ratios measure operating cash flow as a percentage of net written premiums, providing an indicator of free cash flow relative to net sales. The industry’s OCF ratio fell to an estimated 8.4% in 2010 from 8.5% in 2009 and a cyclical peak of 21.2% in 2004.

From 1980 to 2010, the industry’s OCF ratio averaged 12.9%. But OCF ratios varied from a high of 24.2% in 1986, the peak of a historic hard market, to a low of 2.7% in 1999, when underwriting cash flow was –$25.0 billion.

Comparisons with Other Industries
In all but two of the twenty-eight years from the start of ISO’s data for the Fortune 500 in 1983 to 2010, the rate of return for the Fortune 500 exceeded the rates of return for both the property/casualty industry overall and large property/casualty insurers.[16]16. The exceptions were 1986 and 1987. From 1983 to 2010, the median GAAP RONW for the Fortune 500 averaged 13.9% — 5.9 percentage points more than the 8.0% average GAAP RONW for the entire property/casualty industry and 5.3 percentage points more than the 8.5% average GAAP RONW for large property/casualty insurers.

Though the GAAP RONW for the insurance industry overall rose to 5.6% in 2010 from 5.0% in 2009 as the GAAP RONW for large insurers remained at 6.3%, the gap between property/casualty insurers’ rates of return and those for the Fortune 500 widened. With the GAAP rate of return for the Fortune 500 rising to 13.6% in 2010 from 11.1% in 2009, the excess of the GAAP rate of return for the Fortune 500 over that for the property/casualty industry increased to 8.0 percentage points from 6.1 percentage points. Similarly, the excess of the GAAP rate of return for the Fortune 500 over that for large property/casualty insurers grew to 7.2 percentage points in 2010 from 4.7 percentage points in 2009.

Analyses in this study also compare property/casualty insurers’ profitability with that of firms in a broad array of other industries, using COMPUSTAT® data obtained from Standard & Poor’s.[17]17. Standard & Poor's COMPUSTAT® database includes information on several hundred industries. This analysis is based on data only for the industries for which sufficient information was available for all the years in each period studied. Including industries for which sufficient information was available for only some years might have distorted the results. During the ten years from 2000 to 2009 (the latest year for which complete COMPUSTAT data was available), the GAAP RONW for the property/casualty industry averaged 6.3% — 3.1 percentage points less than the 9.4% average GAAP RONW for 301 other industries. In a ranking from most to least profitable during that ten-year period, the property/casualty industry ranked 200 out of 302 industries. The results were similar when ISO lengthened the analysis to include the ten years from 1990 to 1999.

Other Analyses
Additional analyses in this study report on:

  • the performance of insurance stocks;
  • reinsurers’ results and how they compare with those of the industry overall; and
  • underwriting results by line of business.

1. This study defines the U.S. property/casualty insurance industry as all private property/casualty insurers domiciled in the United States, including excess and surplus insurers and domestic insurers owned by foreign parents but excluding state funds for workers compensation and other residual market carriers. Throughout the study, the terms "insurers" and "industry" refer to property/casualty insurers and the property/casualty insurance industry, unless otherwise stated. The data in this report is based mainly on insurers' statutory financial statements as supplied to ISO by April 2, 2011, and excludes foreign subsidiaries of U.S. insurance groups. All figures are net of reinsurance unless otherwise noted and may not balance because of rounding.

2. GAAP stands for Generally Accepted Accounting Principles, the accounting basis used by most industries. Unless otherwise stated, the figures in this report are based on Statutory Accounting Principles (SAP), the accounting basis used by insurers when preparing the annual statements they submit to state regulators. See Appendix C starting on page 88 for a discussion of the major differences between GAAP and SAP.

3. Unless otherwise specified, references to record lows and record highs for ratios and dollar values are based on data extending back to 1959. Record lows and record highs for growth rates are based on data extending back to 1960.

4. ISO estimated the median GAAP rate of return on average net worth for the Fortune 500 using the median GAAP rate of return on year-end shareholders' equity published by Fortune magazine. This study classifies a property/casualty insurer as "large" if the insurer accounts for more than 0.5% of the industry's net written premium. In 2010, thirty-four large property/casualty insurers each wrote more than $2.1 billion in premiums.

5. Throughout this report, unless stated otherwise, the phrase "income taxes" and the phrase "federal income taxes" both refer to federal and foreign income taxes as shown on the income statements included in property/casualty insurers' statutory annual statements.

6. Statutory rates of return on average policyholders’ surplus equal statutory net income for a period divided by average policyholders’ surplus during the period. ISO compared statutory rates of return for mortgage and financial guaranty insurers with those of other insurers, because ISO’s formula for calculating insurance industry GAAP rates of return may not be suitable for calculating GAAP rates of return for individual segments of the industry with distinct characteristics.

7. Net written premiums rose every year from 1960, when ISO’s premium growth data begins, to 2006.

8. Using ISO’s statistical databases, ISO MarketWatch® tracks actual premiums for policies renewed with the same terms and conditions for commercial auto liability, commercial auto physical damage, products liability, premises and operations liability, businessowners, commercial fire, and commercial allied lines, by class and statistical territory.

9. For purposes of its Market Barometer, MarketScout defines small accounts as those generating up to $25,000 in premiums, medium-sized accounts as those generating from $25,001 to $250,000 in premiums, large accounts as those generating from $250,001 to $1,000,000 in premiums, and jumbo accounts as those generating more than $1,000,000 in premiums. The coverage classes for which MarketScout tracks changes in pricing are commercial property, business interruption, businessowners package policies, inland marine, general liability, umbrella/excess, commercial auto, workers compensation, professional liability, directors and officers liability, employment practices liability, fiduciary, crime, and surety. The industry classes for which MarketScout tracks changes in pricing are manufacturing, contracting, service, habitational, public entity, transportation, and energy. ISO averaged monthly values as reported by MarketScout to derive the annual values referenced in this report.

10. The PCS® data about direct catastrophe losses is based on information available through May 16, 2011, and is subject to change as more information about the cost of settling claims from past catastrophes becomes available. The data for direct insured losses from catastrophes is on an accident-year basis, excludes loss adjustment expenses, and is for all insurers, including residual-market insurers as well as foreign insurers and reinsurers. Direct catastrophe losses as cited in this study may differ from those published elsewhere because, for purposes of the analysis, ISO defined catastrophic events as those causing direct losses in excess of an inflation-adjusted dollar threshold equivalent to $25 million in 1997 and excluded events causing losses below the threshold.

11. For further information about the individual effects of abnormal catastrophe losses, E&A LLAE, changes in reserve adequacy, and M&FG insurers’ results on combined ratios for the industry, see the analysis starting on page 24. When calculating adjusted combined ratios, ISO smoothed catastrophe losses, excluded E&A LLAE as defined for purposes of the notes to financial statements included in the statutory annual statements insurers file with state regulators, restated other losses to eliminate changes in reserve adequacy, and excluded results for M&FG insurers.

12. Statutory annual statements provide only pretax values for write-downs on impaired investments.

13. ISO obtained closing prices for the S&P 500 back to 1979 from Standard & Poor’s and IHS Global Insight. For purposes of this analysis, the rate of appreciation in insurers’ holdings of common stocks equals the pretax capital gains on common stocks during a year divided by value of their investments in common stocks at the start of the year.

14. Operating cash flow is the sum of underwriting cash flow, net investment income received, and other income received, minus taxes paid

15. ISO’s OCF data extends back to 1979

16. The exceptions were 1986 and 1987.

17. Standard & Poor’s COMPUSTAT® database includes information on several hundred industries. This analysis is based on data only for the industries for which sufficient information was available for all the years in each period studied. Including industries for which sufficient information was available for only some years might have distorted the results.