Private U.S. property/casualty insurers’ net income after taxes rose $1.6 billion to $26.0 billion in first-half 2014 from $24.4 billion in first-half 2013. Reflecting insurers’ net income after taxes, policyholders’ surplus – insurers’ net worth measured according to Statutory Accounting Principles – grew to $671.6 billion at June 30, 2014, from $653.4 billion at year-end 2013.
The increase in insurers’ net income after taxes is the net result of a decline in pretax operating income, an increase in realized capital gains on investments (not included in operating income), and a small reduction in federal and foreign income taxes.
Insurers’ pretax operating income – the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income – fell $1.9 billion to $23.9 billion in first-half 2014 from $25.8 billion in first-half 2013.
Insurers’ realized capital gains on investments rose $3.3 billion to $7.2 billion in the first half of 2014 from $3.9 billion in the first half of 2013.
Insurers’ federal and foreign income taxes dropped $0.1 billion to $5.1 billion from $5.2 billion.
The decrease in insurers’ pretax operating income was driven by declines in net gains on underwriting and net investment income.
Net gains on underwriting fell to $0.3 billion in first-half 2014 from $2.2 billion in first-half 2013. The combined ratio – a key measure of losses and other underwriting expenses per dollar of premium – deteriorated to 98.9 percent for first-half 2014 from 98.0 percent for first-half 2013, according to ISO, a Verisk Analytics (Nasdaq:VRSK) business, and the Property Casualty Insurers Association of America (PCI).
Insurers’ net investment income dropped $0.3 billion to $23.0 billion in first-half 2014 from $23.3 billion in first-half 2013.
Partially offsetting the effects of the declines in net gains on underwriting and net investment income on operating income, insurers’ miscellaneous other income rose $0.3 billion to $0.7 billion in the first half of 2014 from $0.3 billion in the first half of 2013.
With policyholders’ surplus rising more rapidly than insurers’ net income after taxes, insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus slipped to 7.8 percent in first-half 2014 from 8.1 percent in first-half 2013 despite the increase in insurers’ net income.
The property/casualty industry’s 7.8 percent annualized rate of return for first-half 2014 was the net result of double-digit rates of return for mortgage and financial guaranty (M&FG) insurers and single-digit rates of return for other insurers. ISO estimates that M&FG insurers’ annualized rate of return on average surplus rose to 13.4 percent for first-half 2014 from negative 7.5 percent for first-half 2013. Excluding M&FG insurers, the industry’s annualized rate of return fell to 7.7 percent in first-half 2014 from 8.5 percent in first-half 2013.
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.
“The $18.2 billion increase in policyholders’ surplus to a record-high $671.6 billion at June 30, 2014, is a testament to the strength and safety of insurers’ commitment to policyholders. Insurers are strong, well capitalized, and well prepared to pay future claims,” said Robert Gordon, PCI’s senior vice president for policy development and research. “But it only takes one powerful storm to disrupt countless lives and cause tens of billions in damage, and this hurricane season is far from over. Since 1950, there have been 15 catastrophic fourth-quarter hurricanes including Superstorm Sandy, which occurred in the last days of October 2012. And hurricanes are not the only threat. Recent events in the Napa Valley region provide a vivid reminder that millions of Americans live with the ever-present threat of a catastrophic earthquake. Still others of us live in locations at risk of being struck by wildfires, tornadoes, inland flooding, other natural disasters, or a terrorist attack that could cause vast devastation and loss of life. This means that all of us – insurers, homeowners, businesses, and officials at all levels of government – must continue to focus on risk management, disaster readiness, and mitigation aimed at minimizing the human tragedy caused by future catastrophes.”
“While insurers’ net income rose modestly in first-half 2014, the deterioration in underwriting results and the drop in investment income both raise questions about the quality or sustainability of insurers’ earnings. Other factors raising questions about the quality or sustainability of earnings include the extent to which underwriting results benefited from favorable reserve development and the extent to which insurers’ net income benefited from realized capital gains dependent on developments in financial markets,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “Moreover, insurers’ overall rate of return remained subpar compared with long-term historical norms, and insurers now need much better underwriting results just to be as profitable as they were in the past. Insurers’ 7.8 percent annualized rate of return on average surplus for first-half 2014 fell short of insurers’ 9.0 percent average overall rate of return for the 55 years from the start of ISO’s annual data in 1959 to 2013, even though the 98.9 percent combined ratio for first-half 2014 was 5.0 percentage points better than the 103.9 percent average combined ratio for the past 55 years. With investment yields, financial leverage, and tax rates such as those in first-half 2014, ISO estimates that the combined ratio would have to improve to 97.0 percent for insurers to earn their long-term average rate of return.”
According to ISO’s Property Claim Services® (PCS®) unit, catastrophes striking the United States in first-half 2014 caused $12.4 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers), up $2.5 billion compared with the $10.0 billion in direct insured losses caused by catastrophes striking the United States in first-half 2013 and $2.3 billion more than the $10.2 billion average for first-half direct catastrophe losses during the past ten years.
Reflecting the imbalance between growth in premiums and growth in LLAE and the other costs of providing insurance, the combined ratio deteriorated by 0.9 percentage points to 98.9 percent in first-half 2014 from 98.0 percent in first-half 2013.
“Rapid growth in net LLAE more than accounts for the deterioration in underwriting results in first-half 2014,” said Gordon. “If LLAE had risen at the same 4.2 percent rate as earned premiums instead of increasing 6.4 percent, the combined ratio would have improved 0.5 percentage points to 97.4 percent instead of rising 0.9 percentage points to 98.9 percent.“
Underwriting results for first-half 2014 benefited from favorable development of LLAE reserves based on new information and updated estimates for the ultimate cost of old claims from prior accident years, but the amount of favorable reserve development dropped to $7.9 billion in first-half 2014 from $8.3 billion in first-half 2013. Excluding reserve development, net LLAE rose $9.7 billion, or 5.8 percent, to $176.0 billion in first-half 2014 from $166.3 billion in first-half 2013, and the combined ratio increased 0.6 percentage points to 102.2 percent from 101.6 percent.
The $0.3 billion in net gains on underwriting in first-half 2014 amounted to 0.1 percent of the $237.8 billion in net premiums earned during the period, whereas the $2.2 billion in net gains on underwriting in first-half 2013 amounted to 0.9 percent of the $228.2 billion in net premiums earned during that period.
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