P/C Insurers' Bottom Line Through Nine Months Improved as Growth in Premiums and Drop in Losses Boosted Underwriting Results

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JERSEY CITY, N.J., December 23, 2013 — Private U.S. property/casualty insurers’ net income after taxes rose to $43 billion in nine-months 2013 from $27.8 billion in nine-months 2012, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus increasing to 9.5 percent from 6.5 percent.

Insurers’ pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — grew to $45.7 billion in nine-months 2013 from $31.4 billion in nine-months 2012.

The increases in insurers’ pretax operating income, net income after taxes, and overall rate of return were driven by a $16.7 billion swing to $10.5 billion in net gains on underwriting in nine-months 2013 from $6.2 billion in net losses on underwriting in nine-months 2012. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 95.8 percent for nine-months 2013 from 100.7 percent for nine-months 2012, according to ISO, a Verisk Analytics company (Nasdaq:VRSK), and the Property Casualty Insurers Association of America (PCI).

The swing to net gains on underwriting in nine-months 2013 reflects premium growth and a decline in loss and loss adjustment expenses (LLAE).

Insurers’ overall results for nine-months 2013 also benefited from a $2.1 billion increase in net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — to $40.4 billion in nine-months 2013 from $38.3 billion in nine-months 2012.

The improvement in underwriting and investment results was partially offset by a drop in miscellaneous other income and higher taxes. Miscellaneous other income fell $1.3 billion to $0.9 billion in nine-months 2013 from $2.2 billion in nine-months 2012 as insurers’ federal and foreign income taxes rose $2.2 billion to $8.7 billion from $6.5 billion.

Policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — grew $37.3 billion to $624.4 billion at September 30, 2013, from $587.1 billion at year-end 2012, largely as a result of insurers’ $43 billion in net income after taxes.

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.

“Insurers’ overall results for nine-months 2013 were certainly better than their results for nine-months 2012, with insurers posting their highest annualized rate of return and their best combined ratio through nine months since 2007,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “Insurers’ strong underwriting results lifted their annualized overall rate of return through nine months to 9.5 percent. Further analysis reveals that relatively benign weather, a sharp drop in U.S. catastrophe losses, and special developments affecting the mortgage and financial guaranty insurance segment account for much of the improvement in insurers’ results.”

The property/casualty industry’s 9.5 percent annualized rate of return for nine-months 2013 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 climbed to positive 35.6 percent for nine-months 2013 from negative 6.3 percent for nine-months 2012. Excluding M&FG insurers, the industry’s annualized rate of return rose to 8.9 percent in nine-months 2013 from 6.8 percent in nine-months 2012.

“The $37.3 billion increase in policyholders’ surplus to a record-high $624.4 billion at September 30, 2013, 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. “Contrary to dire expert predictions that the 2013 hurricane season would be very active, the United States emerged relatively unscathed. But none of us can afford to let good luck lull us into a false sense of security. Catastrophe modeling indicates that events far more devastating than Superstorm Sandy, Hurricane Katrina, and the terrorist attack on the World Trade Center may occur in the future. This means that all of us — insurers, policyholders, first responders, and federal, state, and local officials — must stay focused on building economic resiliency and minimizing the human tragedy that we’ll suffer when the worst occurs.”

Underwriting Results
Underwriting gains (or losses) equal earned premiums minus LLAE, other underwriting expenses, and dividends to policyholders. Insurers’ net gains on underwriting swung to positive $10.5 billion in nine-months 2013 from negative $6.2 billion in nine-months 2012 as premiums rose and LLAE declined.

Net written premiums rose $14.7 billion, or 4.2 percent, to $363.4 billion for nine-months 2013 from $348.7 billion for nine-months 2012. Net earned premiums rose $13.4 billion, or 4 percent, to $348.3 billion from $334.8 billion.

Net LLAE (after reinsurance recoveries) dropped $7.4 billion, or 3 percent, to $235.6 billion in nine-months 2013 from $243 billion in nine-months 2012.

The growth in premiums and the decline in LLAE were partially offset by increases in other underwriting expenses and dividends to policyholders. Other underwriting expenses rose $4 billion to $100.9 billion in nine-months 2013 from $96.9 billion in nine-months 2012 as dividends to policyholders grew $0.1 billion to $1.3 billion from $1.1 billion.

The decrease in overall net LLAE was largely driven by a decline in catastrophe losses, with ISO estimating that private insurers’ net LLAE from catastrophes dropped $4.5 billion to $12.5 billion in nine-months 2013 from $17.1 billion in nine-months 2012. 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 fell $2.9 billion, or 1.3 percent, to $223 billion through nine-months 2013 from $225.9 billion through nine-months 2012.

U.S. insurers’ $12.5 billion in net LLAE from catastrophes in nine-months 2013 and their $17.1 billion in net LLAE from catastrophes in nine-months 2012 are both 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 overseas were immaterial in both nine-months 2013 and nine-months 2012.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in nine-months 2013 caused $11.7 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers), down $4.5 billion compared with the $16.2 billion in direct insured losses caused by catastrophes striking the United States in nine-months 2012 and $8.3 billion less than the $20 billion average for nine-month direct catastrophe losses during the past ten years.

Reflecting the growth in premiums and the decline in LLAE, the combined ratio improved by 4.9 percentage points to 95.8 percent in nine-months 2013 from 100.7 percent in nine-months 2012.

“The drop in net LLAE accounts for almost half of the improvement in underwriting results in nine-months 2013,” said Gordon. “More specifically, insurers’ combined ratio improved by 4.9 percentage points in nine-months 2013, with the drp in net LLAE accounting for 2.1 percentage points of the improvement. The remaining 2.8 percentage points of improvement are due to premium growth.”

The $2.9 billion decline in noncatastrophe LLAE was a result of favorable development of LLAE reserves based on new information and updated estimates for the ultimate cost of old claims from prior accident years. The amount of favorable reserve development increased $5.5 billion to $13.9 billion in nine-months 2013 from $8.4 billion in nine-months 2012, with much of the increase in favorable reserve development attributable to special developments in the M&FG sector. Excluding M&FG insurers, the amount of favorable loss reserve development rose $0.7 billion to $10.8 billion in nine-months 2013 from $10.1 billion in nine-months 2012.

If not for the $5.5 billion increase in favorable reserve development for the industry overall, noncatastrophe LLAE would have risen $2.7 billion, or 1.2 percent, to $228.6 billion in nine-months 2013, and the combined ratio would have improved by 3.3 percentage points to 97.4 percent.

The $10.5 billion in net gains on underwriting in nine-months 2013 amounted to 3 percent of the $348.3 billion in net premiums earned during the period, whereas the $6.2 billion in net losses on underwriting in nine-months 2012 amounted to 1.8 percent of the $334.8 billion in net premiums earned during that period.

“Largely as a result of favorable reserve development attributable to special developments, mortgage and financial guaranty insurers posted superior underwriting results,” said Murray. “Mortgage and financial guaranty insurers’ combined ratio dropped 137.7 percentage points to 32.1 percent for nine-months 2013 from 169.9 percent for nine-months 2012, and their combined ratio for nine-months 2013 was 64.4 percentage points better than the 96.6 percent combined ratio for the industry excluding mortgage and financial guaranty insurers.”

M&FG insurers’ net written premiums increased 8.6 percent to $3.9 billion for nine-months 2013 from $3.6 billion for nine-months 2012. Their net earned premiums were essentially unchanged at $4.3 billion in both nine-months 2013 and nine-months 2012.

M&FG insurers’ underwriting results benefited from a $6.1 billion, or 95.9 percent, decline in LLAE to $0.3 billion in nine-months 2013 from $6.4 billion in nine-months 2012. But M&FG insurers’ other underwriting expenses climbed $0.3 billion, or 38.1 percent, to $1 billion through the first nine months of 2013 from $0.7 billion through the first nine months of 2012.

Excluding M&FG insurers, industry net written premiums rose 4.2 percent in nine-months 2013 to $359.6 billion, net earned premiums increased 4.1 percent to $344 billion, LLAE fell 0.5 percent to $235.3 billion, other underwriting expenses grew 3.9 percent to $99.9 billion, and dividends to policyholders climbed 13.3 percent to $1.3 billion. As a result, the combined ratio for the industry excluding M&FG insurers improved to 96.6 percent for nine-months 2013 from 99.8 percent for nine-months 2012.

“Growth in overall net written premiums held fairly steady, accelerating only slightly to 4.2 percent in nine-months 2013 from 4.1 percent in nine-months 2012. But written premiums through nine months haven’t grown this rapidly since 2006, when they rose 5.1 percent compared with their level a year earlier,” said Murray. “Though growth held steady for the industry overall, growth varied significantly by sector. Excluding mortgage and financial guaranty insurers, net written premium growth for insurers writing predominantly commercial lines slowed to 2.9 percent in nine-months 2013 from 5.8 percent in nine-months 2012 as premium growth for insurers writing more balanced books of business slipped to 4 percent from 4.2 percent. Conversely, net written premium growth for insurers writing mostly personal lines accelerated to 5.3 percent in nine-months 2013 from 3.1 percent in nine-months 2012.”

“Underwriting profitability improved for all major sectors of the industry, reflecting the effects of premium growth and the drop in LLAE,” said Gordon. “Excluding mortgage and financial guaranty insurers, commercial lines insurers’ combined ratio improved 5 percentage points to 93.3 percent as balanced insurers’ combined ratio improved 3.5 percentage points to 99.2 percent and personal lines insurers’ combined ratio improved 1.7 percentage points to 97.6 percent.”

Investment Results
Insurers’ net investment income — primarily dividends from stocks and interest on bonds — fell 2.9 percent to $34.3 billion in nine-months 2013 from $35.4 billion in nine-months 2012. But insurers’ realized capital gains on investments climbed $3.1 billion to $6 billion in nine-months 2013 from $2.9 billion a year earlier. Combining net investment income and realized capital gains, overall net investment gains grew $2.1 billion, or 5.4 percent, to $40.4 billion for nine-months 2013 from $38.3 billion for nine-months 2012.

“The decline in insurers’ investment income reflects declines in market yields, with the annualized yield on insurers’ investments falling to 3.3 percent in nine-months 2013 from 3.6 percent in nine-months 2012. Insurers’ average holdings of cash and invested assets — the assets on which insurers earn investment income — actually rose 4.4 percent in nine-months 2013 compared with their average holdings a year earlier,” said Murray. “Based on annual data, insurers’ investment yield last fell as low as 3.3 percent in 1967. From 1960 to 2012, insurers’ investment yield averaged 5.2 percent but ranged from as low as 2.8 percent in 1961 to as high as 8.2 percent in 1984 and 1985. Prospectively, we may see some further weakness in investment income as insurers reinvest funds from older, higher-yielding bonds at the lower rates now available.”

Combining the $6 billion in realized capital gains in nine-months 2013 with $20.1 billion in unrealized capital gains during the same period, insurers posted $26.2 billion in overall capital gains for nine-months 2013 — up $6.5 billion from $19.7 billion in overall capital gains for nine-months 2012.

“Insurers’ overall capital gains for nine-months 2013 reflect positive developments in financial markets. The New York Stock Exchange Composite rose 13.9 percent in nine-months 2013 as the Dow Jones Industrial Average increased 15.5 percent, the S&P 500 rose 17.9 percent, and the NASDAQ Composite climbed 24.9 percent,” said Gordon. “Insurers’ investment results also benefited from a decrease in realized losses on impaired investments, which fell $1.3 billion to $1.2 billion in nine-months 2013 from $2.5 billion in nine-months 2012.”

Pretax Operating Income
Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — grew $14.3 billion to $45.7 billion for nine-months 2013 from $31.4 billion for nine-months 2012. The $14.3 billion increase in operating income was the net result of the $16.7 billion swing to $10.5 billion in net gains on underwriting from $6.2 billion in net losses on underwriting, the $1 billion decline in net investment income, and the $1.3 billion decline in miscellaneous other income.

M&FG insurers’ operating income rose to positive $3.5 billion in nine-months 2013 from negative $1 billion in nine-months 2012. Excluding M&FG insurers, the insurance industry’s operating income climbed $9.8 billion to $42.2 billion for nine-months 2013 from $32.4 billion for nine-months 2012.

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 2013 totaled $43 billion — up $15.2 billion from $27.8 billion for nine-months 2012. The $15.2 billion increase in net income was the net result of the $14.3 billion increase in operating income, the $3.1 billion increase in realized capital gains, and the $2.2 billion increase in federal and foreign income taxes.

M&FG insurers’ net income after taxes climbed to positive $3.4 billion for nine-months 2013 from negative $0.6 billion for nine-months 2012. Excluding M&FG insurers, the insurance industry’s net income after taxes grew $11.2 billion to $39.6 billion for the nine months ending September 30, 2013, from $28.4 billion for the nine months ending September 30, 2012.

Policyholders’ Surplus
Policyholders’ surplus climbed $37.3 billion to $624.4 billion as of September 30, 2013, from $587.1 billion at year-end 2012. Additions to surplus in nine-months 2013 included insurers’ $43 billion in net income after taxes, $20.1 billion in unrealized capital gains on investments (not included in net income), and $1.6 billion in new funds paid in.

Those additions were partially offset by $18.7 billion in dividends to shareholders and $8.8 billion in miscellaneous other charges against surplus.

Insurers’ unrealized capital gains on investments rose to $20.1 billion in nine-months 2013 from $16.7 billion in nine-months 2012.

New funds paid in fell to $1.6 billion in nine-months 2013 from $1.8 billion in nine-months 2012.

Dividends to shareholders increased to $18.7 billion in nine-months 2013 from $16.7 billion in nine-months 2012.

The $8.8 billion in miscellaneous charges against surplus in nine-months 2013 compares with $0.6 billion in miscellaneous additions to surplus in nine-months 2012.

M&FG insurers’ surplus grew to $13.7 billion as of September 30, 2013, from $12.1 billion at year-end 2012. Excluding M&FG insurers, industry surplus rose $35.7 billion to $610.6 billion as of September 30 this year from $575 billion as of December 31, 2012.

“Using 12-month trailing premiums, the premium-to-surplus ratio dropped slightly to 0.76 as of September 30, 2013, from 0.77 a year earlier. At 0.76, the premium-to-surplus ratio equaled the annual record low for full-year 2010 based on data extending back to 1959 and was only about half the 1.46 average premium-to-surplus ratio for the 54 years from 1959 to 2012. Similarly, the ratio of loss and loss adjustment expense reserves to surplus as of September 30 this year was 0.92 — down from 0.99 a year earlier and far below the 1.40 average LLAE-reserves-to-surplus ratio for the past 54 years,” said Murray. “These leverage ratios suggest insurers have ample capacity to meet increasing demand for coverage as the economy grows. Moreover, the law of supply and demand suggests that insurers’ ample capacity will actually promote economic growth by limiting the cost of insurance.”

Third-Quarter Results
The property/casualty insurance industry’s consolidated net income after taxes rose to $18.5 billion in third-quarter 2013, up $7.9 billion from $10.6 billion in third-quarter 2012. Property/casualty insurers’ annualized rate of return on average surplus increased to 12 percent in third-quarter 2013 from 7.3 percent a year earlier.

M&FG insurers’ annualized rate of return jumped to positive 114.6 percent in third-quarter 2013 from negative 11.1 percent in third-quarter 2012 as their net income after taxes rose to positive $3.9 billion from negative $0.3 billion. Excluding M&FG insurers, the insurance industry’s annualized rate of return increased to 9.6 percent in third-quarter 2013 from 7.7 percent in third-quarter 2012 as net income after taxes climbed to $14.6 billion from $10.9 billion.

The $18.5 billion in net income after taxes for the entire insurance industry in third-quarter 2013 was a result of $19.9 billion in pretax operating income and $2.2 billion in realized capital gains on investments, less $3.5 billion in federal and foreign income taxes.

The industry’s $19.9 billion in pretax operating income for third-quarter 2013 was up $7.7 billion, or 63.5 percent, from $12.2 billion for third-quarter 2012. The industry’s third-quarter 2013 pretax operating income was the result of $8.2 billion in net gains on underwriting, $11.1 billion in net investment income, and $0.6 billion in miscellaneous other income.

Excluding M&FG insurers, pretax operating income for third-quarter 2013 amounted to $15.8 billion — up $3.1 billion, or 24.9 percent, from the $12.6 billion in pretax operating income for the industry excluding M&FG insurers in third-quarter 2012.

For the industry overall, net gains on underwriting grew $8 billion to $8.2 billion in third-quarter 2013 from $0.2 billion in third-quarter 2012.

ISO estimates that the net LLAE from catastrophes included in private U.S. insurers’ financial results fell to $2.4 billion in third-quarter 2013 from $4.2 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 held steady at $1.8 billion in both third-quarter 2013 and third-quarter 2012, according to ISO’s PCS unit.

Third-quarter 2013 net gains on underwriting amounted to 6.8 percent of the $119.9 billion in premiums earned during the period. Third-quarter 2012 net gains on underwriting amounted to 0.2 percent of the $115.8 billion in premiums earned during that period.

The industry’s combined ratio improved to 91.8 percent in third-quarter 2013 from 98.5 percent in third-quarter 2012. At 91.8 percent, the third-quarter combined ratio had fallen to its lowest level since the 90.6 percent for third-quarter 2006 and was 13.9 percentage points below the 105.7 percent average for the third quarter based on quarterly records extending back to 1986.

The $8.2 billion in net gains on underwriting in third-quarter 2013 was after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders essentially unchanged from their level in third-quarter 2012.

Net written premiums rose $4.6 billion to $126.2 billion in third-quarter 2013 from $121.6 billion in third-quarter 2012, with growth in net written premiums slowing to 3.8 percent in third-quarter 2013 from 5 percent in third-quarter 2012.

Net earned premiums grew $4 billion to $119.9 billion in third-quarter 2013 from $115.8 billion in third-quarter 2012, with growth in net earned premiums slowing to 3.5 percent in third-quarter 2013 from 4 percent in third-quarter 2012.

LLAE fell $5.1 billion, or 6.1 percent, to $77.6 billion in third-quarter 2013 from $82.7 billion in third-quarter 2012.

Excluding M&FG insurers, net written premiums rose 3.7 percent in third-quarter 2013, net earned premiums grew 3.6 percent, LLAE fell 0.5 percent, and the combined ratio dropped to 94.8 percent from 97.7 percent in third-quarter 2012.

“In third-quarter 2013, the industry achieved its fourteenth successive quarter of growth in written premiums, following 12 quarters of declines, and earned premiums have now risen for 13 successive quarters,” said Gordon. “The growth in earned premiums and the drop in loss and loss adjustment expenses were the biggest contributors to improvement in insurers’ overall results in third-quarter 2013.”

The $11.1 billion in net investment income in third-quarter 2013 was down $0.3 billion, or 2.9 percent, from $11.5 billion in third-quarter 2012.

Miscellaneous other income rose to $0.6 billion in third-quarter 2013 from $0.5 billion in third-quarter 2012.

Realized capital gains on investments increased to $2.2 billion in third-quarter 2013 from $1.2 billion in third-quarter 2012.

Combining net investment income and realized capital gains, net investment gains grew $0.6 billion, or 4.5 percent, to $13.3 billion in third-quarter 2013 from $12.7 billion a year earlier.

Insurers posted $4.9 billion in unrealized capital gains on investments in third-quarter 2013 — down $1 billion from the $6 billion in unrealized capital gains in third-quarter 2012. Combining realized and unrealized amounts, the insurance industry posted $7.1 billion in overall capital gains in third-quarter 2013, with overall capital gains down $0.1 billion from $7.2 billion in third-quarter 2012.

The $7.1 billion in overall capital gains for third-quarter 2013 is after $0.6 billion in realized losses on impaired investments, with the amount of realized losses on impaired investments being essentially the same as it was in third-quarter 2012.

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, the company provides statistical, actuarial, underwriting, and claims information; policy language; information about specific locations; fraud identification tools; 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 member of the Verisk Insurance Solutions group at Verisk Analytics (Nasdaq:VRSK). 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.

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