Private U.S. property/casualty insurers’ net income after taxes fell to $13.8 billion in first-quarter 2014 from $14.3 billion in first-quarter 2013.
Insurers’ pretax operating income – the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income – fell to $13.7 billion in first-quarter 2014 from $15.8 billion in first-quarter 2013.
Also, insurers’ overall annualized rate of return on average policyholders’ surplus fell to 8.4 percent from 9.6 percent, according to ISO and the Property Casualty Insurers Association of America (PCI).
The decreases were the result of deterioration in underwriting results, with net gains on underwriting falling to $2.2 billion in first-quarter 2014 from $4.5 billion in first-quarter 2013. The combined ratio deteriorated to 97.3 percent for first-quarter 2014 from 94.9 percent for first-quarter 2013,
Net gains on underwriting dropped as premium growth slowed and net loss and loss adjustment expenses (LLAE) surged upward, with quarterly LLAE rising for the first time since Superstorm Sandy struck in fourth-quarter 2012.
The deterioration in underwriting results in first-quarter 2014 also reflects increases in underwriting expenses and dividends to policyholders, which both rose compared with their levels in first-quarter 2013.
Partially offsetting the decline in net gains on underwriting, insurers’ net investment gains rose $1.3 billion to $14.1 billion in first-quarter 2014 from $12.8 billion in first-quarter 2013.
Insurers’ Yield on Investments Lowest Since 1965
Policyholders’ surplus grew $8.7 billion to a record $662.0 billion at March 31, 2014, from $653.3 billion at year-end 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.
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. He said insurers are in a position to fulfill their obligations even if a storm more devastating than Superstorm Sandy or Hurricane Katrina should hit.
Although “better-than-average underwriting profitability” offset weakness in investment income, with premium growth slowing and loss and loss adjustment expenses surging upward in first-quarter 2014, “there is some risk that net gains on underwriting will slip further as the year progresses,” said Michael R. Murray, ISO’s assistant vice president for financial analysis.
Murray said insurers’ 8.4 percent annualized overall rate of return for first-quarter 2014 equaled the average rate of return since the beginning of 1986.
“In fact, insurers’ net investment income – primarily interest on bonds and dividends from stocks – peaked at $15.4 billion in fourth-quarter 2007 but totaled just $11.2 billion in first-quarter 2014 as a result of low investment yields brought about by the Great Recession, the financial crisis, and residual weakness in the economy,” Murray said.
Murray said further slippage in underwriting results “could lead to downward pressure on insurers’ overall profitability, as current investment yields make offsetting increases in investment income rather unlikely.”
Net written premiums climbed $4.2 billion, or 3.6 percent, to $121.4 billion in first-quarter 2014 from $117.2 billion in first-quarter 2013.
Similarly, net earned premiums grew $4.9 billion to $117.9 billion in first-quarter 2014.
Outpacing the growth in premiums, LLAE rose $6.4 billion, or 8.6 percent, while other underwriting expenses increased $0.7 billion, or 2.0 percent.
Increases in both catastrophe and non-catastrophe losses contributed to the upward surge in overall LLAE. ISO estimates that private U.S. insurers’ net LLAE from catastrophes increased to $3.2 billion for first-quarter 2014 from $2.5 billion a year ago.
Direct insured property losses from catastrophes striking the United States totaled $3.0 billion in first-quarter 2014, up $0.2 billion from $2.8 billion in first-quarter 2013, according to ISO’s Property Claim Services (PCS) based on the information available through July 2, 2014.
Reflecting the imbalance between growth in premiums and growth in LLAE and the other costs of providing insurance, the combined ratio deteriorated by 2.3 percentage points to 97.3 percent.
“The increase in net LLAE more than accounts for the deterioration in underwriting results in first-quarter 2014,” said Gordon. “If LLAE had been flat instead of increasing 8.6 percent, the combined ratio would have improved 3.1 percentage points to 91.8 percent instead of rising 2.3 percentage points to 97.3 percent.”
Underwriting results would have deteriorated more in first-quarter 2014 if not for $5.5 billion in favorable development of LLAE reserves based on new information and updated estimates for the ultimate cost of old claims from prior accident years.