The property and casualty insurance industry is on the road toshowing a profit for 2010 despite a 3 percent slide inthird-quarter net income, an industry report said.

The Jersey City, N.J.-based Insurance Services Office, inconjunction with the Property Casualty Insurers Association ofAmerica and the Insurance Information Institute, released thenine-month and third-quarter p&c industry results lastweek, saying that the industry is on the road to positive growthfor the year.

For the first nine months of 2010, results showed a robustincrease of 62 percent in net income.

“Property [and] casualty insurers' positive results for thenine-months 2010 show that insurers are well positioned to meet theneeds of consumers and business owners as the economy recovers fromthe Great Recession,” said David Sampson, PCI's president and chiefexecutive officer, in a statement.

“It is now all but certain that the p&c insurance industrywill record positive growth in 2010–the first since 2006,” saidRobert P. Hartwig, president of the I.I.I., in a separate statement. “While underwriting lossesdeteriorated marginally, the industry is still operating on a'breakeven' basis with a combined ratio of 99.7, after excludingmortgage and financial guaranty insurers.”

“Assuming the economic recovery continues, we may see somefirming in insurance markets down the road as increases in demandfor insurance absorb some of the excess capacity that has weighedso heavily on many insurance markets,” said Michael R. Murray,ISO's assistant vice president for financial analysis. “But, fornow, leverage ratios continue to indicate that insurers have excesscapacity.”

For the third quarter, net income dropped $332 million to $10.2billion. Net written premiums grew more than 2 percent, or $2.48billion to $110.7 billion. Net earned premiums rose more than 1percent, or $1.12 billion to $107.3 billion.

The combined ratio in the quarter improved 0.3 points to100.2.

ISO said the decline in third-quarter net income resulted in adrop in p&c insurance annualized rate of return on averagesurplus to 7.5 percent compared to an 8.8 percent return the yearbefore.

Overall, nine-month net income results rose $10.2 billion to$26.7 billion. Net written premiums increased less than 1 percent,or $2.4 billion to $323 billion. Net earned premiums rose close to1 percent, or $2.9 billion to $314.4 billion.

The combined ratio for the nine months deteriorated 0.5 pointsto 101.2.

“Increased profitability and rising capacity through the firstthree quarters are primarily attributable to improved investmentmarket conditions, stable underwriting results and a lack ofmega-catastrophes,” Mr. Hartwig said.

“At the same time, persistent soft market conditions andlingering but receding effects of the deep recession continue toimpact growth. While insurers remain cautious about the economy andfinancial market conditions, there is guarded optimism that bothwill continue to improve as the industry transitions into2011.”

Among some of the other report highlights:

o ISO's Property Claim Services said catastrophes striking theUnited States over the first nine months caused direct insurancelosses (before reinsurance recoveries) of $10.7 billion.

o Mortgage and financial guaranty insurers' net written premiumsdeclined 14.5 percent to $4.2 billion for the nine months of 2010.Net earned premiums dropped 11 percent to $5.1 billion.

o Net investment income fell $900 million to $35 billion duringthe first nine months, but insurers' realized capital gains oninvestments grew by $14 billion, more than reversing $9.6 billionin realized losses for the first nine months in 2009.

o Over the nine months, combined net investment income andrealized gains rose 50 percent to $39.5 billion from $26.3 billionfrom the year before.

In spite of many positive swings in individual line items on theindustry aggregate financial statement, Mr. Murray highlighted adeterioration in the nine-month combined ratio–to 101.2 from100.7–as “a particular cause for concern.”

Citing low levels of investment yields prevailing today and “thesame long-term decline in investment leverage that helped insulateinsurers from the ravages of the financial crisis and GreatRecession,” Mr. Murray said that insurers “now need betterunderwriting results just to be as profitable as they oncewere.”

Mr. Hartwig said the combination of low interest rates andsmaller dividends “are profound and immediate, because there can beno guarantee of a reversal in these trends.”

“The only guarantee is that insurers will continue to facelosses from claims that are as large as or larger than in thepast,” he said. “The bottom line, therefore, is that insurers willneed to earn more in premium through higher rates to compensate forlower investment earnings.”

The report noted that policyholder surplus increased $33.4billion, or more than 6 percent, to $545 billion, above thepre-financial crisis level of $522 billion in 2007.

“The industry is and will remain extremely well capitalized andfinancially prepared to pay very large-scale losses, if necessary,”Mr. Hartwig said.

Referring to the small increase in aggregate premiums recordedthrough nine months, he also noted that the “nascent stabilizationin premium growth comes at an important time for the industry,since it reduces the likelihood that the year will end with afourth consecutive full year of net premiums written declines onthe books. The last time that happened was during the GreatDepression, he said.

Still, the continued soft market–in its seventh straightyear–held back growth to a minimal level, as did current economicconditions.

Mr. Hartwig, an economist, noted that even though the nation'sreal (inflation-adjusted) gross domestic product actually began toexpand during the second half of 2009, growth in p&c insuranceexposure usually lags behind economic growth by a year or more.“This is because the early stages of economic recoveries are alwaysled by productivity gains rather than additions to fixed investment(e.g., plants, equipment) or hiring (which would add to payrolls),”he explained.