What’s on the minds of the analysts?

1. Social Media Use Implies Future Risks, Trends

PALM BEACH, FL – As social media use gains in importance in connecting insurers with policyholders and prospects, social media tools are producing voluminous metrics ripe for expert analysis – notably among actuaries. However, actuaries currently do not have a place at the social media table, and they were urged to pull up their own chair during the recent Casualty Actuarial Society’s Spring Meeting. It may only be a matter of time before actuaries are invited to lend their expertise to the inner circle of social media strategy, but they should not wait for a formal invitation, said panelists at a general session on the effects of social media on property-casualty insurance. Analytical data generated from social media is nearly boundless, and while marketing and communications departments may not know what to make of all of it, actuaries do, panelists concluded. Brian Sullivan, editor of Risk Information, Inc., served as moderator for the session and pointed out that insurers are dealing with the implications of a seismic shift from having a one-to-one chat with a single customer to one-to-many discussions that bring an entire network of friends and foes into a conversation. In this digital age, people are more likely to ask friends and family for advice first through social media tools, such as Facebook, Twitter, or a personal blog, which gives any question, misunderstanding or grievance a wide audience often before an insurer is aware that a problem may exist, he said. And, because social media users report back to their networks, discourse and dialogue have a much longer life than individual conversations of the not-too-distant past.

For this reason, insurers first got into social media as a defensive maneuver, said Terry Golesworthy, president of The Customer Respect Group. Insurers began listening to what customers were saying online, and then decided that since they were listening, they ought to start responding, so company marketing and communication departments assumed responsibility for social media channels. The most basic approach to social media engagement is to get people to become online fans, something which is often not that easy for insurers, Golesworthy said. He explained, “Not many people want to be a fan of an insurance company. It works better for retail, but not as well for insurers.”

Golesworthy said incentives may make a difference in growing a fan base, citing The Hartford’s strategy of donating a dollar to the U.S. Paralympics for every fan of their Facebook page. Golesworthy said there is a “land grab for fans” because when someone clicks the “Like” button on a company Facebook page, it is broadcast to their social network, and their online friends may be inclined to do the same.

A second strategy for social media is to build trust through ratings and reviews, since people trust reviews from peers over the advice of presumed experts. He cited USAA’s success in increasing the number of new insurance policies written due to online ratings from current policyholders. Additionally, Golesworthy suggested a third step for social media is to identify brand advocates who will speak on your behalf and come to your defense against critics. Patrick Sullivan, a writer with Risk Information, Inc., said he is part of the generation that grew up with social media as a constant presence. He suggested insurers can engage their online audiences to create conversations with either a customer service focus or a content focus.

Sullivan said an example of a customer service focus would be to provide case-by-case scenarios to help people anticipate problems, such as explaining certain insurance coverage issues. A content focus engages people in a more timely and active way, such as by offering tips on hurricane season preparedness as the storms approach.

Roosevelt Mosley of Pinnacle Actuarial Resources observed that other industries look at social media analytics to get ahead of an issue, paying close attention to what customers are saying so they can respond appropriately. Because actuaries by nature are on the lookout for the next big trend, they can add value to the social media discussion, he said.

Mosley said the actuary’s skill at measuring potential future risk can be applied to social media, and he encouraged conference attendees to seek opportunities outside traditional actuarial risks. “The social media trend is just beginning, and the winds are changing,” said Mosley. He said company marketing and communication departments can no longer be the sole owners of social media processes because it impacts the entire range within a company, and everyone seems to be on the planning committee except the actuary.

When asked if Facebook would be a lasting social media tool, Patrick Sullivan said people are wedded to the idea of social media, but that does not necessarily mean Facebook will remain the standard. Some companies are hesitant about getting on the Facebook bandwagon due to concerns over privacy, and panelists thought privacy may become less of an issue with the very notion of privacy changing as the digital environment makes it harder to hold something back.

Insurance is a complex industry, and other industries have an advantage elusive to insurers, according to Brian Sullivan. He explained that it is a simple process for an entity such as Amazon.com to recommend new purchases based on past shopping habits, and insurers have not yet learned how to take their data to similar advances. “Nothing is that easy for insurers,” said Sullivan. “With different products in different states, we will never be able to deliver what others deliver with their data,” he said. Still, the industry needs to start somewhere, said Mosley. “We can begin to understand the techniques to start the process and refine it,” he said. “The business purpose for social media analysis would be to understand if it drives long-term customer value or retention.”

 2. Reinsurance Stocks Face Difficulties; Deep Implications for the Market

PHILADELPHIA, — With reinsurance stocks trading below book value, three equity analysts at the CAS Seminar on Reinsurance faced down the key questions about the industry sector: Why are reinsurance stocks depressed? What will have to happen to lift their prices?

On hand with the answers were property-casualty insurance analysts Meyer Shields, analyst at Stifel, Nicolaus & Co.; Gregory Locraft, an executive director at Morgan Stanley; and Dean Evans, equity analyst at Keefe Bruette & Woods. Raju Bohra, executive vice president at Willis Re moderated the panel session held last week.

The analysts’ outlooks on the market differed. Evans called himself “cautious,” Locraft termed himself “more bullish,” and Shields was “more optimistic than most,” particularly regarding property-casualty brokerages. But their assessments centered on the same two topics:

Low rates. Insurers and reinsurers have been reducing their rates for several years, a standard phase in the wellestablished underwriting cycle. The belief that rates are at their ebb, or close to it, has buyers waiting for an upturn. “Wall Street wants things to get really bad before it starts buying,” Locraft said. Reinsurers’ earnings have been driven by reserve reductions. Companies regularly re-estimate what they will pay on outstanding claim liabilities, and in recent years those estimates have been falling. The takedowns help earnings, but leave investors wary, since those estimates tend to be cyclical, just like rates. And investors don’t want to invest in companies on the cusp of reserve increases, especially if rates remain low. “It has never paid to get in front of that trend,” Locraft said. Evans, the Keefe Bruette & Woods analyst, noted that reinsurers have a lot of positives to help their valuations. They are valued at 85 percent to 90 percent of book value, well below the long-term average of 120 percent to 130 percent. Catastrophe rates appear to be rising, on the heels of 15 months of large catastrophe losses, starting with last year’s Chilean earthquake, through the 2011 March earthquake and tsunami in Japan.

In addition, reinsurers have a strong capital position, with a clean balance sheet – having avoided the absolute worst of the 2008 stock market meltdown, he noted. And merger activity seems poised to rise, which would make all reinsurers more valuable. But Evans also expressed concerns. Investment yields are low, which lowers the return that reinsurers generate when they invest premium while waiting for claims to settle. Also, outside of catastrophe business, pricing remains weak, he said. Evans also worries about loss trends; if claims were to become more frequent or settlements grow significantly, reinsurers would suffer. And he believes reinsurers are overexposed to major catastrophes, especially in Florida.

Locraft, the Morgan Stanley director, recognized the same issues, but believes they are already reflected in reinsurers’ stock prices. To that he added the impact of a major upgrade in the hurricane model from modeling firm RMS. The new model significantly increases reinsurers’ estimates of hurricane loss exposure to certain storms, putting upward pressure on reinsurance prices, he said.Overall, Locraft believes that the “best of breed” companies will reward their owners over time.

Shields, the Stifel Nicolaus analyst, observed that favorable reserve development is drying up, with reserve releases for commercial insurers down 50 percent thus far in 2011 from a year earlier. He emphasized his positive view for insurance brokers, noting the top three – Aon/Benfield, Guy Carpenter and Willis – command a significant share of the market, so any good news for reinsurers will help them, too.

Shields also pointed to Solvency II, Europe’s regulatory overhaul, as a positive for brokerages. The regulation will, in essence, require many companies to purchase more reinsurance. No matter whom they purchase from, he said, brokerages stand to benefit from the brokerage fees they would receive. “The reinsurance industry has perfected the art of getting capital quickly,” Shields said. Their moves are so smooth, he said, that it has helped flatten the pricing cycle for catastrophe reinsurance.

Locraft noted that companies have been returning capital through stock buybacks. Companies that buy back more than 4 percent of their shares typically perform better. “It kind of becomes a no-brainer as long as you can withstand a Japan-type event,” he said. For now, though, he expects few buybacks, as companies will hold their capital through hurricane season, which lasts through the summer.

But Evans questioned whether reinsurers will be able to attract capital as quickly in the future. After major catastrophes like Hurricane Katrina or the World Trade Center, new companies were formed. “Are capital markets going to step in and recapitalize like they did in the past?” he said.

And he added a caution regarding stock buybacks. “We do tend to penalize companies that make herky-jerky capital actions,” he said. Companies are rewarded for a more consistent approach, he said.

Worse still are companies that continually raise their reserve estimates. Even one across-the-board increase raises suspicions on Wall Street, said Locraft, because one increase is invariably followed by more.

He said “These things come in bunches and trigger a cockroach effect. When Wall Street sees one, everybody scatters.”

 3. Insurers’ Profits and Profitability Fell in Q1 2011 as Net Losses on Underwriting Balloon

JERSEY CITY, N.J— Private U.S. property/casualty insurers’ net income after taxes dropped to $7.8 billion in first-quarter 2011 from $8.9 billion in first-quarter 2010, with insurers’ annualized rate of return on average policyholders’ surplus — a key measure of overall profitability — decreasing to 5.6 percent from 6.8 percent. Reflecting insurers’ $7.8 billion in net income after taxes, policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — rose $7.8 billion, or 1.4 percent, to a record $564.7 billion at March 31, 2011, from $556.9 billion at December 31, 2010.

Driving the declines in insurers’ net income and overall rate of return, net losses on underwriting grew to $4.5 billion in first-quarter 2011 from $1.8 billion in firstquarter 2010. The combined ratio

— a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 103.3 percent in first-quarter 2011 from 101.1 percent in first-quarter 2010, according to ISO and the Property Casualty Insurers Association of America (PCI). Partially offsetting the deterioration in underwriting results, net investment gains — the sum of net investment income and realized capital gains (or losses) on investments

— grew $1 billion to $13.5 billion in first-quarter 2011 from $12.6 billion in first-quarter 2010. In addition, miscellaneous other income rose $0.1 billion to $0.5 billion in the first quarter of 2011 from $0.4 billion in the first quarter of 2010, and insurers’ federal and foreign income taxes dropped $0.5 billion to $1.8 billion from $2.3 billion.

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

“While the declines in property/casualty insurers’ net income and return on surplus in first-quarter 2011 may be bad news for insurance companies, overall surplus rose to a record high and consumers can rest assured that insurers have the financial resources necessary to cover claims even if this year’s hurricane season is as bad as the experts predict,” said David Sampson, PCI’s president and CEO. “Combining insurers’ record $564.7 billion in policyholders’ surplus, their $560.8 billion in loss and loss adjustment expense reserves, and their $202.7 billion in unearned premium reserves as of March 31, 2011, insurers had $1.3 trillion to pay claims and meet other contingencies. Nonetheless, the devastatingly deadly EF5 tornado that struck Joplin, Missouri, last month and other tragic events around the globe — such as the monstrous earthquake and tsunami that struck northeast Japan in March — should serve as vivid reminders that catastrophes can strike anywhere at any moment. Moreover, one well-respected team of forecasters has warned that the probability of the United States being struck by one or more major hurricanes this year is greater than 70 percent — far higher than the 52-percent average for the last century. These risks should remind Americans that all of us — insurers, households, businesses, elected officials, and first responders — need to undertake disaster preparedness to minimize the human suffering and economic loss from future catastrophes.”

“With mounting net losses on underwriting driving the decline in insurers’ net income and overall profitability in first-quarter 2011, there’s no denying that insurers continued to face substantial headwinds in their core business — underwriting. While there were some positive developments that bode well, there have also been some negative developments that suggest insurers’ results will get worse,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “On the plus side of the ledger, net written premiums rose for the fourth consecutive quarter, with net written premiums rising in first-quarter 2011 by the largest amount since third-quarter 2006. On the negative side, PCS data as of June 20 shows that catastrophes striking the United States in second-quarter 2011 had already caused $14.7 billion in direct insured losses to property — more than double the $6.4 billion in direct insured losses from all the catastrophes that occurred in second-quarter 2010 — and we know that second-quarter 2011 catastrophe losses will rise further when losses from four recent events are added to the tally.

Moreover, increases in stock markets helped fuel insurers’ capital gains on investments in first-quarter 2011. But from March 31 to June 20, the Dow Jones Industrial Average fell 1.9 percent, the S&P 500 fell 3.6 percent, the New York Stock Exchange Composite fell 4.4 percent, and the NASDAQ Composite fell 5.4 percent — suggesting that insurers’ results for second-quarter 2011 may well suffer from capital losses on investments. Yet these near-term negatives could have positive implications farther down the road to the extent that they erase some of insurers’ excess capacity and thereby hasten a turn in the insurance pricing cycle.”

The property/casualty insurance industry’s 5.6 percent annualized rate of return for first-quarter 2011 was the net result of a negative rate of return for mortgage and financial guaranty insurers and a single-digit rate of return for other insurers. ISO estimates that mortgage and financial guaranty insurers’ rate of return on average surplus for first-quarter 2011 was negative 17.7 percent, up from negative 66 percent for firstquarter 2010. Excluding mortgage and financial guaranty insurers, the industry’s rate of return dropped to 6.1 percent for first-quarter 2011 from 8.3 percent for first-quarter 2010. “Insurers’ overall rate of return for first-quarter 2011 was clearly subpar,” said Sampson. “Insurers’ 5.6 percent annualized rate of return for the period was 4 percentage points less than their 9.6 percent average annualized first-quarter rate of return for the past ten years. Moreover, insurers’ rate of return remained far below benchmarks like the 13.9 percent long-term average rate of return for the Fortune 500.”

Underwriting Results Net gains (or losses) on underwriting equal net premiums earned minus net loss and loss adjustment expenses (LLAE), other underwriting expenses, and dividends to policyholders. Net losses on underwriting grew to $4.5 billion in first-quarter 2011 from $1.8 billion in first-quarter 2010, a $2.7 billion increase, as growth in LLAE and other underwriting expenses outpaced growth in premiums earned.

Net written premiums rose $3.7 billion, or 3.5 percent, to $108.6 billion for first-quarter 2011 from $104.9 billion for first-quarter 2010. Net earned premiums rose $2.1 billion, or 2 percent, to $104.8 billion from $102.7 billion. Net LLAE (after reinsurance recoveries) rose $4 billion, or 5.4 percent, to $78.5 billion in first-quarter 2011 from $74.5 billion in first-quarter 2010.

Other underwriting expenses — primarily acquisition expenses; expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — rose $0.8 billion, or 2.9 percent, to $30.4 billion in first-quarter 2011 from $29.5 billion in firstquarter 2010.

Dividends to policyholders remained essentially unchanged at $0.5 billion.

Overall LLAE increased despite a decline in LLAE from catastrophes striking the United States. ISO estimates that private insurers’ net LLAE from such catastrophes fell $0.7 billion to $2 billion in first-quarter 2011 from $2.7 billion in first-quarter 2010. According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in first-quarter 2011 caused $1.9 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual-market insurers and foreign insurers) — down $0.7 billion from $2.6 billion in first-quarter 2010. Excluding the LLAE attributable to U.S. catastrophes, overall net LLAE rose $4.7 billion, or 6.5 percent, to $76.5 billion in first‑quarter 2011 from $71.8 billion in first-quarter 2010.

For those U.S. insurers that cover or reinsure property overseas, firstquarter 2011 financial results included LLAE from events such as the earthquake and tsunami that struck northeastern Japan on March 11 and the earthquake that struck Christchurch, New Zealand, on February 22 (February 21 UTC). Estimating the amount of LLAE from foreign catastrophes included in U.S. insurers’ financial results is difficult, but the available information suggests that U.S. insurers’ net LLAE for firstquarter 2011 included between $2 billion and $5 billion in LLAE attributable to catastrophes striking elsewhere around the globe.

Total net LLAE for both firstquarter 2011 and first-quarter 2010 was reduced by downward revisions to the estimated ultimate cost of claims incurred in prior years and consequent releases of LLAE reserves. Such downward revisions and releases dropped to $4.5 billion in first-quarter 2011 from $5.6 billion in first-quarter 2010. Excluding those amounts, net LLAE increased $2.9 billion, or 3.7 percent, to $83 billion in first-quarter 2011 from $80.1 billion in first-quarter of 2010.

“The 3.5 percent increase in total industry net written premiums in first-quarter 2011 was the first increase in first-quarter net written premiums since 2007 and the largest since 2004, when first-quarter net written premiums rose 4.8 percent. Moreover — and possibly sending a signal about the nature of things to come — year-to-year comparisons improved for each of the three major subsectors of the industry tracked by ISO,” said Murray. “Net written premium growth for insurers writing predominantly personal lines accelerated to 3.8 percent in first-quarter 2011 from 2.2 percent in first-quarter 2010, with premium growth for insurers writing more balanced books of business increasing to 3.1 percent from negative 1.4 percent. Premium growth for insurers writing predominantly commercial lines rose to 3.5 percent from negative 5.3 percent, though first-quarter 2011 net written premiums for insurers writing predominantly commercial lines may have benefited to some extent from premiums paid by foreign insurers to reinstate reinsurance coverage.”

“The deterioration in underwriting profitability as measured by the combined ratio is a particular cause for concern, because today’s low investment yields, together with the long-term decline in investment leverage that helped insulate insurers from the ravages of the financial crisis and the Great Recession, mean insurers need better underwriting results just to be as profitable as they once were,” said Sampson.

Insurers’ annualized rate of return for first-quarter 2011 fell short of insurers’ annualized first-quarter rate of return for 10 of the 11 years from 1986 to 1996, even though insurers’ combined ratio for first-quarter 2011 was better than their combined ratio for the first quarter of each of those 11 years. As a result, insurers’ 5.6 percent annualized rate of return for first-quarter 2011 was 4.8 percentage points lower than their 10.3 percent average annualized first-quarter rate of return for 1986 to 1996, while insurers’ 103.3 percent combined ratio for first-quarter of 2011 was 4.3 percentage points better than their 107.6 percent average first-quarter combined ratio for 1986 to 1996.

The $4.5 billion in net losses on underwriting in first-quarter 2011 amounted to 4.3 percent of the $104.8 billion in net premiums earned during the period, whereas the $1.8 billion in net losses on underwriting in first-quarter 2010 amounted to 1.7 percent of the $102.7 billion in net premiums earned during that period. “Reflecting the residual weakness in the economy, mortgage and financial guaranty insurers continued to suffer disproportionate losses on underwriting,” said Murray. “Though mortgage and financial guaranty insurers’ combined ratio improved 54.6 percentage points to 176.9 percent for first-quarter 2011 from 231.5 percent for firstquarter 2010, their combined ratio for first-quarter 2011 was 74.7 percentage points worse than the 102.2 percent combined ratio for the industry excluding mortgage and financial guaranty insurers.” Mortgage and financial guaranty insurers’ net written premiums grew 4.9 percent to $1.3 billion for first-quarter 2011. But their net earned premiums fell 5.9 percent to $1.5 billion in first-quarter 2011 from $1.6 billion a year earlier, with the 54.6-percentage-point improvement in mortgage and financial guaranty insurers’ combined ratio driven by a 32.1 percent drop in their loss and loss adjustment expenses to $2.3 billion in first-quarter 2011 from $3.4 billion in first-quarter 2010. Mortgage and financial guaranty insurers’ other underwriting expenses rose to $0.4 billion in first-quarter 2011 from $0.3 billion a year earlier.

Excluding mortgage and financial guaranty insurers, industry net written premiums rose 3.5 percent in first-quarter 2011 to $107.2 billion, earned premiums increased 2.2 percent to $103.3 billion, loss and loss adjustment expenses grew 7.1 percent to $76.2 billion, other underwriting expenses increased 2.7 percent to $30 billion, and dividends to policyholders were virtually unchanged at $0.5 billion. As a result, the combined ratio for the industry excluding mortgage and financial guaranty insurers rose 3.1 percentage points to 102.2 percent for first-quarter 2011 from 99 percent for first-quarter 2010. Investment Results

Insurers’ net investment income — primarily dividends from stocks and interest on bonds — increased 8.3 percent to $12.6 billion in first-quarter 2011 from $11.6 billion in first-quarter 2010. Insurers’ realized capital gains on investments were essentially unchanged at $1 billion in both first-quarter 2011 and first-quarter 2010. Combining net investment income and realized capital gains, overall net investment gains rose 7.6 percent to $13.5 billion in first-quarter 2011 from $12.6 billion in first-quarter 2010.

Combining the $1 billion in realized capital gains in first-quarter 2011 with $3.9 billion in unrealized capital gains during the period, insurers posted $4.9 billion in overall capital gains in firstquarter 2011 — down $0.9 billion compared with insurers’ $5.8 billion in overall capital gains on investments in first-quarter 2010. “Unfortunately, the growth in insurers’ investment income in first-quarter 2011 was a result of special developments. In particular, insurers’ investment income in first-quarter 2011 benefited from $1 billion that one insurer received from a major noninsurance operation acquired in early 2010 and $0.4 billion in special dividends that the same insurer received from a foreign subsidiary,” said Sampson. “Excluding those items, insurers’ net investment income declined $0.5 billion, or 4 percent, to $11.1 billion in first-quarter 2011 from $11.6 billion in first-quarter 2010.”

“Insurers’ overall capital gains for first-quarter 2011 reflect developments in financial markets. The NASDAQ Composite rose 4.8 percent during the first three months of 2011, with the S&P 500, the New York Stock Exchange Composite, and the Dow Jones Industrial Average rising 5.4 percent, 5.5 percent, and 6.4 percent, respectively,” said Murray. “Insurers’ investment results also benefited from a decline in realized capital losses on impaired investments, which dropped to $0.8 billion in first-quarter 2011 from $1.1 billion in first-quarter 2010.”

Pretax Operating Income

Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — fell $1.6 billion, or 15.9 from $10.2 billion for first-quarter 2010. The $1.6 billion decrease in operating income was the net result of the $2.7 billion increase in net losses on underwriting, the $1 billion increase in net investment income, and the $0.1 billion increase in miscellaneous other income to $0.5 billion for first-quarter 2011 from $0.4 billion for firstquarter 2010.

Mortgage and financial guaranty insurers’ operating income rose to negative $0.7 billion in first-quarter 2011 from negative $1.4 billion in first-quarter 2010. Excluding mortgage and financial guaranty insurers, the insurance industry’s operating income fell $2.3 billion, or 19.8 percent, to $9.4 billion in first-quarter 2011 from $11.7 billion in first-quarter 2010.

Net Income after Taxes

Combining operating income, realized capital gains (losses), and federal and foreign income taxes, the insurance industry’s net income after taxes for first-quarter 2011 totaled $7.8 billion, down 12.2 percent from $8.9 billion for first-quarter 2010. The $1.1 billion decrease in net income was the net result of the $1.6 billion decrease in operating income and the $0.5 billion decrease in federal and foreign income taxes to $1.8 billion for first-quarter 2011 from $2.3 billion a year earlier.

Mortgage and financial guaranty insurers’ net income after taxes rose to negative $0.5 billion for first-quarter 2011 from negative $1.8 billion for first-quarter 2010. Excluding mortgage and financial guaranty insurers, the insurance industry’s net income after taxes dropped $2.4 billion, or 22.2 percent, to $8.3 billion for first-quarter 2011 from $10.7 billion for first-quarter 2010.

Policyholders’ Surplus

Policyholders’ surplus increased $7.8 billion to $564.7 billion at March 31, 2011, from $556.9 billion at year-end 2010. Additions to surplus in first-quarter 2011 included insurers’ $7.8 billion in net income after taxes, $3.9 billion in unrealized capital gains on investments (not included in net income), $1.5 billion in new funds paid in (new capital raised by insurers), and $0.4 billion in miscellaneous additions to surplus. Those additions were partially offset by $5.7 billion in dividends to shareholders. Insurers’ unrealized capital gains on investments dropped to $3.9 billion in firstquarter 2011 from $4.8 billion in first-quarter 2010.

The $1.5 billion in new funds paid in during first-quarter 2011 was down from a record-high $22.7 billion in first-quarter 2010 but close to the $1.6 billion average for all first quarters since 1986, when ISO’s quarterly records begin.

The $0.4 billion in miscellaneous additions to surplus in first-quarter 2011 compared with $1.3 billion in miscellaneous charges against surplus in first-quarter 2010. The $5.7 billion in dividends to shareholders in first-quarter 2011 was down $0.4 billion, or 6.4 percent, from $6.1 billion in first-quarter 2010. Mortgage and financial guaranty insurers’ surplus fell $0.3 billion to $12.1 billion at March 31, 2011, from $12.3 billion at year-end 2010. Excluding mortgage and financial guaranty insurers, industry surplus increased $8.1 billion to $552.6 billion at the end of first-quarter 2011 from $544.5 billion as of December 31, 2010.

“Key leverage ratios suggest that insurance industry as a whole is exceptionally well capitalized at this point, with both the ratio of 12-month premiums to surplus and the ratio of loss and loss adjustment expense reserves to surplus falling to new record lows in first-quarter 2011 based on quarterly data extending back to 1986,” said Murray. “These leverage ratios provide simple measures of the amount of risk supported by each dollar of surplus — the lower the leverage ratios, the more likely an insurer has the financial wherewithal to absorb shock losses and other adverse developments. With the premium-to-surplus ratio dropping to 0.75 in first-quarter 2011 from 1.88 in fourth-quarter 1986 and the ratio of loss and loss adjustment expense reserves to surplus falling to 0.99 from a high of 2.15 in third-quarter 1990, the insurance industry is well positioned to come to the aid of policyholders during the hurricane season this year. But to the extent that these same leverage ratios provide insight into insurers’ capacity utilization and the potential supply of insurance, they help explain why some commercial insurance markets have remained so soft for so long.”