ISO Release: P/C Insurers’ Net Income and Overall Profitability Both Declined In Nine-Months 2014

Contact: Giuseppe Barone for ISO
(201) 507-9500
Jeffrey Brewer for PCI
(847) 553-3763
Loretta Worters for I.I.I.
(212) 346-5500

JERSEY CITY, N.J., January 26, 2015 — Private U.S. property/casualty insurers’ net income after taxes fell $5.1 billion to $37.7 billion in nine-months 2014 from $42.7 billion in nine-months 2013. Reflecting the decline in net income, insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus slipped to 7.6 percent in nine-months 2014 from 9.4 percent in nine-months 2013.

The drop in insurers’ net income after taxes was driven by a decline in pretax operating income, with the decline in pretax operating income partially offset by an increase in realized capital gains on investments (not included in operating income) and lower 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 $8.9 billion to $36.6 billion in nine-months 2014 from $45.5 billion in nine-months 2013.

Insurers’ realized capital gains on investments rose $2.8 billion to $8.8 billion in the first nine months of 2014 from $6.0 billion in the first nine months of 2013.

Insurers’ federal and foreign income taxes fell to $7.7 billion in nine-months 2014 billion from $8.8 billion in nine-months 2013.

The decrease in insurers’ pretax operating income was largely driven by deterioration in underwriting results, with net gains on underwriting falling to $4.3 billion in nine-months 2014 from $10.3 billion in nine-months 2013. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 97.7 percent for nine-months 2014 from 95.8 percent for nine-months 2013, according to ISO, a Verisk Analytics (Nasdaq:VRSK) business, and the Property Casualty Insurers Association of America (PCI).

Insurers’ net investment income was essentially unchanged at $34.3 billion in both nine-months 2014 and nine-months 2013.

Exacerbating the effect of the deterioration in underwriting results on operating income, insurers’ miscellaneous other income fell $2.8 billion to negative $1.9 billion in the first nine months of 2014 from positive $0.9 billion in the first nine months of 2013.

The property/casualty industry’s 7.6 percent annualized rate of return for nine-months 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 fell to 14.8 percent for nine-months 2014 from 34.4 percent for nine-months 2013. Excluding M&FG insurers, the industry’s annualized rate of return fell to 7.4 percent in nine-months 2014 from 8.8 percent in nine-months 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.

Reflecting insurers’ net income through nine-months 2014, policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — grew to a record $673.9 billion at September 30, 2014, from $653.4 billion at year-end 2013.

“The $20.5 billion increase in policyholders’ surplus to a record-high $673.9 billion at September 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. “While the U.S. has escaped being struck by catastrophic hurricanes in recent years, we were hit by six in 2005, and those six storms generated more than $58 billion in insured losses. Moreover, we are mindful that it only takes one powerful storm or catastrophic event to disrupt countless lives and cause tens of billions in damage. This means  insurers, homeowners, businesses, and officials at all levels of government must remain focused on risk management, disaster readiness, loss mitigation, and building economic resiliency to minimize the human tragedy caused by future catastrophes.”

“The deterioration in underwriting results raises 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 absence of hurricane losses, the extent to which insurers’ net income benefited from realized capital gains dependent on developments in financial markets, and reports indicating commercial insurance markets may soon start to soften as a result of excess capacity,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “The prospect that underwriting results could deteriorate as we close the books for 2014 and move though 2015 is a bit troubling because insurers’ overall rate of return is already subpar compared with long-term historical norms and because insurers now need much better underwriting results just to be as profitable as they were in the past. Insurers’ 7.6 percent annualized rate of return on average surplus for nine-months 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 97.7 percent combined ratio for nine-months 2014 was 6.1 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 nine-months 2014, ISO estimates that the combined ratio would have to improve to 95.4 percent for insurers to earn their long-term average rate of return, and that seems unlikely anytime soon.”

Underwriting Results

Underwriting gains (or losses) equal earned premiums minus loss and loss adjustment expenses (LLAE), other underwriting expenses, and dividends to policyholders. Insurers’ net gains on underwriting dropped to $4.3 billion in nine-months 2014 from $10.3 billion in nine-months 2013 as growth in premiums fell short of growth in the cost of providing insurance protection.

Net written premiums rose $14.0 billion, or 3.9 percent, to $377.0 billion for nine-months 2014 from $363.0 billion for nine-months 2013. Net earned premiums rose $14.3 billion, or 4.1 percent, to $362.3 billion from $347.9 billion.

Net LLAE (after reinsurance recoveries) rose $17.5 billion, or 7.4 percent, to $253.1 billion in nine-months 2014 from $235.6 billion in nine-months 2013 as other underwriting expenses rose $2.9 billion, or 2.9 percent, to $103.7 billion in nine-months 2014 from $100.8 billion in nine-months 2013.

Conversely, dividends to policyholders fell $0.1 billion to $1.2 billion from $1.3 billion.

The increase in overall net LLAE reflects increases in both catastrophe and noncatastrophe losses.

ISO estimates that private insurers’ net LLAE from catastrophes rose $3.1 billion to $15.9 billion in nine-months 2014 from $12.8 billion in nine-months 2013. Those amounts exclude LLAE that emerged after insurers closed their books for each period but do include late-emerging LLAE from events in prior periods.

Net LLAE excluding catastrophes rose $14.4 billion, or 6.5 percent, to $237.2 billion through nine-months 2014 from $222.8 billion through nine-months 2013.

U.S. insurers’ $15.9 billion in net LLAE from catastrophes in nine-months 2014 is primarily attributable to catastrophes that struck the United States. Though estimating U.S. insurers’ LLAE from catastrophes elsewhere around the globe is difficult, the available information suggests that U.S. insurers’ net LLAE from catastrophes elsewhere around the world was immaterial in both nine-months 2014 and nine-months 2013.

According to ISO’s Property Claim Services^® (PCS^®) unit, catastrophes striking the United States in nine-months 2014 caused $14.7 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers), up $2.9 billion compared with the $11.8 billion in direct insured losses caused by catastrophes striking the United States in nine-months 2013 but $4.0 billion less than the $18.8 billion average for nine-month 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 1.9 percentage points to 97.7 percent in nine-months 2014 from 95.8 percent in nine-months 2013.

“Rapid growth in net LLAE more than accounts for the deterioration in underwriting results in nine-months 2014,” said Gordon. “If LLAE had risen at the same 4.1 percent rate as earned premiums instead of climbing 7.4 percent, the combined ratio would have improved 0.3 percentage points to 95.6 percent instead of rising 1.9 percentage points to 97.7 percent.”

Underwriting results for nine-months 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 $8.9 billion in nine-months 2014 from $13.6 billion in nine-months 2013. Excluding reserve development, net LLAE rose $12.8 billion, or 5.1 percent, to $262.0 billion in nine-months 2014 from $249.1 billion in nine-months 2013, and the combined ratio increased 0.4 percentage points to 100.2 percent from 99.7 percent.

The $4.3 billion in net gains on underwriting in nine-months 2014 amounted to 1.2 percent of the $362.3 billion in net premiums earned during the period, whereas the $10.3 billion in net gains on underwriting in nine-months 2013 amounted to 3.0 percent of the $347.9 billion in net premiums earned during that period.

Excluding M&FG insurers, industry net written premiums rose 4.0 percent in nine-months 2014 to $373.6 billion, net earned premiums increased 4.3 percent to $358.5 billion, LLAE rose 6.8 percent to $251.3 billion, other underwriting expenses grew 2.7 percent to $102.5 billion, and dividends to policyholders dropped 5.0 percent to $1.2 billion. As a result, the combined ratio for the industry excluding M&FG insurers deteriorated to 97.9 percent for nine-months 2014 from 96.6 percent for nine-months 2013.

“Overall net written premium growth eased to 3.9 percent in nine-months 2014 from 4.1 percent in nine-months 2013, with the weakness in premium growth concentrated in the commercial lines,” said Gordon. “Excluding mortgage and financial guaranty insurers, net written premiums for insurers writing predominantly commercial lines grew 2.9 percent in nine-months 2014. In contrast, premiums for insurers writing more balanced books of business rose 3.1 percent as premiums for insurers writing predominantly personal lines climbed 5.5 percent.”

“Reflecting the slowdown in overall premium growth and the upward surge in LLAE, underwriting profitability deteriorated for all major sectors of the industry,” said Murray. “Excluding mortgage and financial guaranty insurers, commercial lines insurers’ combined ratio rose 1.8 percentage points in nine-months 2014 to 95.2 percent as balanced insurers’ combined ratio increased 1.0 percentage points to 100.1 percent and personal lines insurers’ combined ratio climbed 1.0 percentage point to 98.8 percent.”

“Exceptional underwriting results contributed to mortgage and financial guaranty insurers’ superior overall rate of return,” said Murray. “Though mortgage and financial guaranty insurers’ combined ratio rose 50.9 percentage points to 83.0 percent for nine-months 2014 from 32.1 percent for nine-months 2013, their combined ratio for nine-months 2014 was 14.9 percentage points better than the 97.9 percent combined ratio for the industry excluding mortgage and financial guaranty insurers. Reflecting the difference in combined ratios, mortgage and financial guaranty insurers’ 14.8 percent annualized overall rate of return for nine-months 2014 was 7.4 percentage points higher than the 7.4 percent annualized rate of return for other insurers.”

M&FG insurers’ net written premiums fell 11.8 percent to $3.4 billion for nine-months 2014 from $3.9 billion for nine-months 2013, and their net earned premiums fell 11.0 percent to $3.8 billion from $4.3 billion. But M&FG insurers’ LLAE rose to $1.8 billion in nine-months 2014 from $0.3 billion in nine-months 2013 as their other underwriting expenses increased to $1.2 billion from $1.0 billion. Reflecting those developments, M&FG insurers’ net gains on underwriting dropped by $2.2 billion to $0.8 billion in nine-months 2014 from $3.0 billion in nine-months 2013.

Investment Results

Insurers’ net investment income — primarily dividends from stocks and interest on bonds — was essentially unchanged at $34.3 billion in both nine-months 2014 and nine-months 2013. But insurers’ realized capital gains on investments climbed $2.8 billion to $8.8 billion in nine-months 2014 from $6.0 billion a year earlier. Combining net investment income and realized capital gains, overall net investment gains grew 6.9 percent to $43.1 billion for nine-months 2014 from $40.3 billion for nine-months 2013.

“Insurers’ investment income held steady despite a decline in the annualized yield on insurers’ investments, which fell to 3.1 percent in nine-months 2014 from 3.3 percent in nine-months 2013. Insurers’ average holdings of cash and invested assets — the assets on which insurers earn investment income — rose 6.3 percent in nine-months 2014 compared with their average holdings a year earlier,” said Gordon. “Based on annual data, insurers’ investment yield last fell to 3.1 percent in 1965. From 1960 to 2013, insurers’ investment yield averaged 5.1 percent but ranged from as low as 2.8 percent in 1961 to as high as 8.2 percent in 1984 and 1985.”

Combining the $8.8 billion in realized capital gains in nine-months 2014 with $7.1 billion in unrealized capital gains during the same period, insurers posted $15.9 billion in overall capital gains for nine-months 2014 — down $10.4 billion from the $26.2 billion in overall capital gains for nine-months 2013.

“Insurers’ overall capital gains for nine-months 2014 reflect positive developments in financial markets. The Dow Jones Industrial Average increased 2.8 percent in nine-months 2014 as the New York Stock Exchange Composite rose 2.9 percent, the S&P 500 rose 6.7 percent, and the NASDAQ Composite climbed 7.6 percent,” said Murray. “Insurers’ overall capital gains would have been larger if not for an increase in realized losses on impaired investments, which grew to $1.4 billion in nine-months 2014 from $1.2 billion in nine-months 2013.”

Pretax Operating Income

Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — fell $8.9 billion to $36.6 billion for nine-months 2014 from $45.5 billion for nine-months 2013. With investment income holding steady, the $8.9 billion decline in operating income was the result of the $6.0 billion drop in net gains on underwriting and the $2.8 billion decrease in miscellaneous other income.

M&FG insurers’ operating income fell to $1.9 billion in nine-months 2014 from $3.5 billion in nine-months 2013. Excluding M&FG insurers, the insurance industry’s operating income fell $7.3 billion to $34.7 billion for nine-months 2014 from $42.0 billion for nine-months 2013.

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 nine-months 2014 totaled $37.7 billion — down $5.1 billion, or 11.9 percent, from $42.7 billion for nine-months 2013. The $5.1 billion decrease in net income was the net result of the $8.9 billion drop in operating income, the $2.8 billion increase in realized capital gains, and a $1.0 billion decline in federal and foreign income taxes.

M&FG insurers’ net income after taxes fell to $1.8 billion for nine-months 2014 from $3.4 billion for nine-months 2013. Excluding M&FG insurers, the insurance industry’s net income after taxes fell $3.4 billion to $35.9 billion in nine-months 2014 from $39.3 billion in nine-months 2013.

Policyholders’ Surplus

Policyholders’ surplus climbed $20.5 billion to $673.9 billion as of September 30, 2014, from $653.4 billion at year-end 2013. Additions to surplus in nine-months 2014 included insurers’ $37.7 billion in net income after taxes, $7.1 billion in unrealized capital gains on investments (not included in net income), and $4.2 billion in new funds paid in. Those additions were partially offset

Insurers’ unrealized capital gains on investments fell to $7.1 billion in nine-months 2014 from $20.2 billion in nine-months 2013.

New funds paid in grew to $4.2 billion in nine-months 2014 from $1.6 billion in nine-months 2013.

Dividends to shareholders increased to $23.6 billion in nine-months 2014 from $18.8 billion in nine-months 2013.

The $4.8 billion in miscellaneous charges against surplus in nine-months 2014 compares with $9.0 billion in miscellaneous charges against surplus in nine-months 2013.

M&FG insurers’ surplus grew to $15.9 billion as of September 30, 2014, from $15.7 billion at year-end 2013. Excluding M&FG insurers, industry surplus rose $20.3 billion to $658.0 billion as of September 30 last year from $637.7 billion as of December 31, 2013.

“Using 12-month trailing premiums, the premium-to-surplus ratio edged down to 0.73 as of September 30, 2014, from 0.75 a year earlier. Similarly, the ratio of loss and loss adjustment expense reserves to surplus fell to 0.86 as of September 30 last year from 0.92 as of September 30, 2013,” said Murray. “To the extent that those leverage ratios shed light on the amount of risk supported by each dollar of surplus, insurers are extremely well capitalized at this point and have ample capacity to meet increasing demand for coverage as the economy grows. The 0.73 premium-to-surplus ratio as of September 30 is only about half of the 1.45 average premium-to-surplus ratio based on annual data for the 55 years from 1959 to 2013, while the 0.86 LLAE-reserves-to-surplus ratio as of the end of nine-months 2014 is far below the 1.39 average for the last 55 years.”

Third-Quarter Results

The property/casualty insurance industry’s consolidated net income after taxes dropped to $11.7 billion in third-quarter 2014, down $6.6 billion from $18.3 billion in third-quarter 2013. Property/casualty insurers’ annualized rate of return on average surplus fell to 6.9 percent in third-quarter 2014 from 11.8 percent a year earlier.

M&FG insurers’ annualized rate of return fell to 17.5 percent in third-quarter 2014 from 110.4 percent in third-quarter 2013 as their net income after taxes fell to $0.7 billion from $3.9 billion. Excluding M&FG insurers, the insurance industry’s annualized rate of return slipped to 6.7 percent in third-quarter 2014 from 9.5 percent in third-quarter 2013 as net income after taxes fell to $11.0 billion from $14.3 billion.

The $11.7 billion in net income after taxes for the entire insurance industry in third-quarter 2014 was a result of $12.7 billion in pretax operating income and $1.6 billion in realized capital gains on investments, less $2.6 billion in federal and foreign income taxes.

The industry’s $12.7 billion in pretax operating income for third-quarter 2014 was down $7.0 billion, or 35.4 percent, from $19.7 billion for third-quarter 2013.

The industry’s third-quarter 2014 pretax operating income was the net result of $4.0 billion in net gains on underwriting, $11.3 billion in net investment income, and $2.6 billion in miscellaneous other losses.

Excluding M&FG insurers, pretax operating income for third-quarter 2014 amounted to $11.8 billion — down $3.7 billion, or 24.1 percent, from the $15.6 billion in pretax operating income for the industry excluding M&FG insurers in third-quarter 2013.

For the industry overall, net gains on underwriting dropped $4.2 billion to $4.0 billion in third-quarter 2014 from $8.1 billion in third-quarter 2013.

ISO estimates that the net LLAE from catastrophes included in private U.S. insurers’ financial results rose to $2.9 billion in third-quarter 2014 from $2.5 billion a year earlier. Those amounts exclude LLAE that emerged after insurers closed their books for each period but do include late-emerging LLAE from events in prior periods.

Excluding loss adjustment expenses, direct insured losses for all insurers from catastrophes striking the United States in third-quarter 2014 totaled $2.1 billion — up from $1.9 billion a year earlier, according to ISO’s PCS unit.

Third-quarter 2014 net gains on underwriting amounted to 3.2 percent of the $124.4 billion in premiums earned during the period, whereas third-quarter 2013 net gains on underwriting amounted to 6.8 percent of the $119.8 billion in premiums earned during that period.

The industry’s combined ratio deteriorated to 95.5 percent in third-quarter 2014 from 91.8 percent in third-quarter 2013.

The $4.0 billion in net gains on underwriting in third-quarter 2014 was after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders remaining the same as they were in third-quarter 2013.

Net written premiums rose $4.5 billion, or 3.6 percent, to $130.6 billion in third-quarter 2014 from $126.0 billion in third-quarter 2013.

Net earned premiums grew $4.7 billion, or 3.9 percent, to $124.4 billion in third-quarter 2014 from $119.8 billion in third-quarter 2013.

Excluding M&FG insurers, industry net written premiums rose 3.8 percent in third-quarter 2014 to $129.3 billion, net earned premiums increased 4.0 percent to $123.0 billion, LLAE rose 5.3 percent to $84.4 billion, other underwriting expenses grew 3.8 percent to $34.8 billion, and dividends to policyholders remained at $0.3 billion. As a result, the combined ratio for the industry excluding M&FG insurers deteriorated to 95.7 percent for third-quarter 2014 from 94.9 percent for third-quarter 2013.

“In third-quarter 2014, the industry overall achieved its eighteenth consecutive quarter of growth in written premiums, following 12 quarters of declines. Moreover, the 95.5 percent combined ratio for third-quarter 2014 was 9.9 percentage points better than the 105.3 percent average for the third quarter based on quarterly records extending back to 1986,” said Gordon. “However, excluding mortgage and financial guaranty insurers, net gains on underwriting fell by $0.8 billion to $3.6 billion in third-quarter 2014 from $4.4 billion in third-quarter 2013 as the combined ratio deteriorated to 95.7 percent from 94.9 percent.”

Net investment income for the industry overall rose $0.3 billion, or 3.0 percent, to $11.3 billion in third-quarter 2014 from $11.0 billion in third-quarter 2013.

Miscellaneous other income fell to negative $2.6 billion in third-quarter 2014 from positive $0.6 billion in third-quarter 2013.

Realized capital gains on investments dropped to $1.6 billion in third-quarter 2014 from $2.1 billion in third-quarter 2013.

Combining net investment income and realized capital gains, net investment gains fell to $12.9 billion in third-quarter 2014 from $13.1 billion in third-quarter 2013.

Insurers posted $0.8 billion in unrealized capital losses on investments in third-quarter 2014 — a $5.9 billion adverse swing from the $5.1 billion in unrealized capital gains on investments in third-quarter 2013. Combining realized and unrealized amounts, the insurance industry posted $0.8 billion in overall capital gains in third-quarter 2014 — down $6.4 billion from the $7.2 billion in overall capital gains on investments in third-quarter 2013.

Insurers’ $1.6 billion in realized capital gains in third-quarter 2014 was the net result of $0.9 billion in realized losses on impaired investments and $2.5 billion in realized gains on other investments, with realized losses on impaired investments rising to $0.9 billion in third-quarter 2014 from $0.6 billion in third-quarter 2013.

About ISO

Since 1971, ISO has been a leading source of information about property/casualty insurance risk. For a broad spectrum of commercial and personal lines of insurance, ISO provides statistical, actuarial, underwriting, and claims information and analytics; compliance and fraud identification tools; policy language; information about specific locations; and technical services. ISO serves insurers, reinsurers, agents and brokers, insurance regulators, risk managers, and other participants in the property/casualty insurance marketplace. ISO is a Verisk Analytics (Nasdaq:VRSK) business. For more information, visit www.iso.com and www.verisk.com.  

About PCI

PCI is composed of more than 1,000 member companies, representing the broadest cross section of insurers of any national trade association. PCI members write over $195 billion in annual premium, 39 percent of the nation’s property casualty insurance. Member companies write 46 percent of the U.S. automobile insurance market, 32 percent of the homeowners market, 37 percent of the commercial property and liability market, and 41 percent of the private workers compensation market. For more information, visit www.pciaa.net.