P/C Insurers’ Net Income Rose Modestly In First-Half 2014 As Increase In Realized Capital Gains Offset Ongoing Weakness in Operating Income

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., October 6, 2014 — 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.”

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 $0.3 billion in first-half 2014 from $2.2 billion in first-half 2013 as growth in premiums fell short of growth in the cost of providing insurance protection.

Net written premiums rose $9.5 billion, or 4.0 percent, to $246.4 billion for first-half 2014 from $236.9 billion for first-half 2013. Net earned premiums rose $9.7 billion, or 4.2 percent, to $237.8 billion from $228.2 billion.

Net LLAE (after reinsurance recoveries) rose $10.1 billion, or 6.4 percent, to $168.1 billion in first-half 2014 from $158.0 billion in first-half 2013 as other underwriting expenses rose $1.5 billion, or 2.2 percent, to $68.5 billion in first-half 2014 from $67.0 billion in first-half 2013.

Conversely, dividends to policyholders fell $0.1 billion to $0.9 billion from $1.0 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 $2.6 billion to $13.0 billion in first-half 2014 from $10.3 billion in first-half 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 $7.5 billion, or 5.1 percent, to $155.1 billion through six-months 2014 from $147.6 billion through six-months 2013.

U.S. insurers’ $13.0 billion in net LLAE from catastrophes in first-half 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 first-half 2014 and first-half 2013.

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.

“Superior underwriting results contributed to mortgage and financial guaranty insurers’ superior overall rate of return,” said Murray. “Mortgage and financial guaranty insurers’ combined ratio dropped 42.7 percentage points to 88.0 percent for first-half 2014 from 130.7 percent for first-half 2013, and their combined ratio for first-half 2014 was 11.0 percentage points better than the 99.0 percent combined ratio for the industry excluding mortgage and financial guaranty insurers. Reflecting the difference in combined ratios, mortgage and financial guaranty insurers’ 13.4 percent annualized overall rate of return for first-half 2014 was 5.6 percentage points higher than the 7.7 percent annualized rate of return for other insurers.”

M&FG insurers’ net written premiums fell 13.2 percent to $2.2 billion for first-half 2014 from $2.5 billion for first-half 2013, and their net earned premiums fell 16.3 percent to $2.4 billion from $2.9 billion. But M&FG insurers’ underwriting expenses were essentially unchanged at $0.7 billion for both first-half 2014 and first-half 2013, and M&FG insurers’ underwriting results benefited from a $1.6 billion, or 55.4 percent, decline in LLAE to $1.3 billion in first-half 2014 from $2.9 billion in first-half 2013.

Excluding M&FG insurers, industry net written premiums rose 4.2 percent in first-half 2014 to $244.2 billion, net earned premiums increased 4.5 percent to $235.4 billion, LLAE rose 7.6 percent to $166.8 billion, other underwriting expenses grew 2.2 percent to $67.8 billion, and dividends to policyholders dropped 6.3 percent to $0.9 billion. As a result, the combined ratio for the industry excluding M&FG insurers deteriorated to 99.0 percent for first-half 2014 from 97.6 percent for first-half 2013.

“Overall net written premium growth slowed to 4.0 percent in first-half 2014 from 4.3 percent in first-half 2013.  But premium growth varied significantly by sector,” said Gordon. “Excluding mortgage and financial guaranty insurers, net written premium growth for insurers writing predominantly commercial lines slid 0.5 percentage points to 3.0 percent in first-half 2014 as premium growth for insurers writing more balanced books of business slipped 1.2 percentage points to 3.5 percent. In contrast, premium growth for insurers writing mostly personal lines rose 0.8 percentage points to 5.6 percent in first-half 2014.”

“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 first-half 2014 to 95.4 percent as balanced insurers’ combined ratio increased 2.3 percentage points to 102.0 percent and personal lines insurers’ combined ratio climbed 0.7 percentage points to 100.0 percent.”

Investment Results Insurers’ net investment income — primarily dividends from stocks and interest on bonds — fell 1.4 percent to $23.0 billion in first-half 2014 from $23.3 billion in first-half 2013. But insurers’ realized capital gains on investments climbed $3.3 billion to $7.2 billion in first-half 2014 from $3.9 billion a year earlier. Combining net investment income and realized capital gains, overall net investment gains grew $3.0 billion, or 11.0 percent, to $30.1 billion for first-half 2014 from $27.1 billion for first-half 2013.

“The decline in insurers’ investment income reflects a decline in the annualized yield on insurers’ investments, which fell to 3.2 percent in first-half 2014 from 3.4 percent in first-half 2013. Insurers’ average holdings of cash and invested assets — the assets on which insurers earn investment income — actually rose 6.4 percent in first-half 2014 compared with their average holdings a year earlier,” said Gordon. “Based on annual data, insurers’ investment yield last fell below 3.2 percent in 1965, when it was 3.1 percent. 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 $7.2 billion in realized capital gains in first-half 2014 with $7.9 billion in unrealized capital gains during the same period, insurers posted $15.1 billion in overall capital gains for first-half 2014 — down $4.0 billion from $19.0 billion in overall capital gains for first-half 2013.

“Insurers’ overall capital gains for first-half 2014 reflect positive developments in financial markets. The S&P 500 rose 6.1 percent in first-half 2014 as the New York Stock Exchange Composite rose 5.6 percent, the NASDAQ Composite climbed 5.5 percent, and the Dow Jones Industrial Average increased 1.5 percent,” said Murray. “Insurers’ investment results also benefited from a decrease in realized losses on impaired investments, which fell $0.2 billion to $0.5 billion in first-half 2014 from $0.6 billion in first-half 2013.”

Pretax Operating Income Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — shrank $1.9 billion to $23.9 billion for first-half 2014 from $25.8 billion for first-half 2013. The $1.9 billion decrease in operating income was the net result of the $1.9 billion drop in net gains on underwriting, the $0.3 billion decline in net investment income, and the $0.3 billion increase in miscellaneous other income.

M&FG insurers’ operating income climbed to $1.1 billion in first-half 2014 from negative $0.6 billion in first-half 2013. Excluding M&FG insurers, the insurance industry’s operating income fell $3.5 billion to $22.8 billion for first-half 2014 from $26.4 billion for first-half 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 first-half 2014 totaled $26.0 billion — up $1.6 billion, or 6.4 percent, from $24.4 billion for first-half 2013. The $1.6 billion increase in net income was the net result of the $1.9 billion decrease in operating income, the $3.3 billion increase in realized capital gains, and the $0.1 billion decline in federal and foreign income taxes.

M&FG insurers’ net income after taxes rose to $1.1 billion for first-half 2014 from negative $0.5 billion for first-half 2013. Excluding M&FG insurers, the insurance industry’s net income after taxes was essentially unchanged at $24.9 billion for both first-half 2014 and first-half 2013.

Policyholders’ Surplus Policyholders’ surplus climbed $18.2 billion to $671.6 billion as of June 30, 2014, from $653.4 billion at year-end 2013. Additions to surplus in first-half 2014 included insurers’ $26.0 billion in net income after taxes, $7.9 billion in unrealized capital gains on investments (not included in net income), and $3.2 billion in new funds paid in. Those additions were partially offset by $15.8 billion in dividends to shareholders and $3.0 billion in miscellaneous other charges against surplus.

Insurers’ unrealized capital gains on investments fell to $7.9 billion in first-half 2014 from $15.1 billion in first-half 2013.

New funds paid in grew to $3.2 billion in first-half 2014 from $2.7 billion in first-half 2013.

Dividends to shareholders increased to $15.8 billion in first-half 2014 from $11.9 billion in first-half 2013.

The $3.0 billion in miscellaneous charges against surplus in first-half 2014 compares with $3.9 billion in miscellaneous charges against surplus in first-half 2013.

M&FG insurers’ surplus grew to $16.0 billion as of June 30, 2014, from $15.7 billion at year-end 2013. Excluding M&FG insurers, industry surplus rose $17.9 billion to $655.6 billion as of June 30 this year from $637.7 billion as of December 31, 2013.

“Using 12-month trailing premiums, the premium-to-surplus ratio dropped to 0.72 as of June 30, 2014, from 0.76 a year earlier. And the ratio of loss and loss adjustment expense reserves to surplus fell to 0.86 as of June 30 this year from 0.94 as of June 30, 2013,” said Murray. “To the extent that these 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 0.72 premium-to-surplus ratio as of June 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. Similarly, the 0.86 LLAE-reserves-to-surplus ratio as of the end of first-half 2014 is far below the 1.39 average for the 55 years ending 2013.”

Second-Quarter Results The property/casualty insurance industry’s consolidated net income after taxes rose to $12.1 billion in second-quarter 2014, up $2.0 billion from $10.1 billion in second-quarter 2013. Property/casualty insurers’ annualized rate of return on average surplus increased to 7.3 percent in second-quarter 2014 from 6.6 percent a year earlier.

M&FG insurers’ annualized rate of return rose to 10.0 percent in second-quarter 2014 from negative 21.9 percent in second-quarter 2013 as their net income after taxes rose to $0.4 billion from negative $0.8 billion. Excluding M&FG insurers, the insurance industry’s annualized rate of return slipped to 7.2 percent in second-quarter 2014 from 7.3 percent in second-quarter 2013 even though net income after taxes climbed to $11.7 billion from $10.9 billion.

The $12.1 billion in net income after taxes for the entire insurance industry in second-quarter 2014 was a result of $10.1 billion in pretax operating income and $4.2 billion in realized capital gains on investments, less $2.2 billion in federal and foreign income taxes.

The industry’s $10.1 billion in pretax operating income for second-quarter 2014 was up $0.1 billion, or 1.2 percent, from $10.0 billion for second-quarter 2013.

The industry’s second-quarter 2014 pretax operating income was the net result of $2.1 billion in net losses on underwriting, $11.8 billion in net investment income, and $0.4 billion in miscellaneous other income.

Excluding M&FG insurers, pretax operating income for second-quarter 2014 amounted to $9.8 billion — down $1.1 billion, or 10.5 percent, from the $10.9 billion in pretax operating income for the industry excluding M&FG insurers in second-quarter 2013.

For the industry overall, net losses on underwriting shrank $0.2 billion to $2.1 billion in second-quarter 2014 from $2.3 billion in second-quarter 2013.

ISO estimates that the net LLAE from catastrophes included in private U.S. insurers’ financial results rose to $9.8 billion in second-quarter 2014 from $7.9 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 from catastrophes striking the United States in second-quarter 2014 totaled $9.4 billion, up $2.2 billion from the $7.2 billion in direct insured losses caused by catastrophes that struck the United States in second-quarter 2013, according to ISO’s PCS unit.

Second-quarter 2014 net losses on underwriting amounted to 1.7 percent of the $120.2 billion in premiums earned during the period. Second-quarter 2013 net losses on underwriting amounted to 2.0 percent of the $115.3 billion in premiums earned during that period.

The industry’s combined ratio improved to 100.6 percent in second-quarter 2014 from 100.9 percent in second-quarter 2013.

The $2.1 billion in net losses on underwriting in second-quarter 2014 was after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders dropping from $0.5 billion in second-quarter 2013.

Net written premiums rose $5.1 billion, or 4.2 percent, to $125.0 billion in second-quarter 2014 from $119.9 billion in second-quarter 2013.

Net earned premiums grew $4.9 billion, or 4.3 percent, to $120.2 billion in second-quarter 2014 from $115.3 billion in second-quarter 2013.

Excluding M&FG insurers, industry net written premiums rose 4.4 percent in second-quarter 2014 to $123.8 billion, net earned premiums increased 4.5 percent to $119.0 billion, LLAE rose 6.4 percent to $86.8 billion, other underwriting expenses grew 2.6 percent to $34.1 billion, and dividends to policyholders dropped 40.1 percent to $0.3 billion. As a result, the combined ratio for the industry excluding M&FG insurers deteriorated to 100.7 percent for second-quarter 2014 from 100.1 percent for second-quarter 2013.

“In second-quarter 2014, the industry overall achieved its seventeenth consecutive quarter of growth in written premiums, following 12 quarters of declines. Moreover, at 100.6 percent, the second-quarter combined ratio had improved to its lowest level since the 99.5 percent for second-quarter 2009 and was 4.1 percentage points better than the 104.7 percent average for the second quarter based on quarterly records extending back to 1986,” said Gordon. “However, excluding mortgage and financial guaranty insurers, net losses on underwriting rose by more than half to $2.2 billion in second-quarter 2014 from $1.4 billion in second-quarter 2013 as the combined ratio deteriorated to 100.7 percent from 100.1 percent.”

The $11.8 billion in net investment income for the industry overall in second-quarter 2014 was essentially unchanged from second-quarter 2013.

Miscellaneous other income fell to $0.4 billion in second-quarter 2014 from $0.5 billion in second-quarter 2013.

Realized capital gains on investments rose to $4.2 billion in second-quarter 2014 from $2.5 billion in second-quarter 2013.

Combining net investment income and realized capital gains, net investment gains grew $1.7 billion, or 12.0 percent, to $16.0 billion in second-quarter 2014 from $14.3 billion a year earlier.

Insurers posted $6.6 billion in unrealized capital gains on investments in second-quarter 2014 — a $4.5 billion increase from the $2.0 billion in unrealized capital gains on investments in second-quarter 2013. Combining realized and unrealized amounts, the insurance industry posted $10.8 billion in overall capital gains in second-quarter 2014 — a $6.3 billion increase from the $4.5 billion in overall capital gains on investments in second-quarter 2013.

Insurers’ $4.2 billion in realized capital gains in second-quarter 2014 was the net result of $0.2 billion in realized losses on impaired investments and $4.4 billion in realized gains on other investments, with realized losses on impaired investments being essentially unchanged from their level in second-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.