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Profits, Profitability Fall in First Quarter for Property & Casualty Insurers

Staff Writer | July 03, 2014

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, with insurers' overall profitability as measured by their annualized rate of return on average policyholders' surplus falling to 8.4 percent from 9.6 percent, according to ISO, a Verisk Analytics company and the Property Casualty Insurers Association of America (PCI).

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.

Deterioration in underwriting results prompted the decreases in insurers' pretax operating income, net income after taxes, and overall rate of return, with net gains on underwriting falling $2.3 billion to $2.2 billion in first-quarter 2014 from $4.5 billion in first-quarter 2013. The combined ratio, a key measure of losses and other underwriting expenses per dollar of premium, deteriorated to 97.3 percent for first-quarter 2014 from 94.9 percent for first-quarter 2013, according to ISO and PCI.

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, the sum of net investment income and realized capital gains (or losses) on investments, rose $1.3 billion to $14.1 billion in first-quarter 2014 from $12.8 billion in first-quarter 2013. Insurers' results for first-quarter 2014 also benefited from a $0.4 billion increase in miscellaneous other income to $0.2 billion in first-quarter 2014 from negative $0.1 billion in first-quarter 2013. Insurers' federal and foreign income taxes for first-quarter 2014 amounted to $2.8 billion, virtually unchanged from their level a year earlier.

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.

"Policyholders' surplus, the funds available to cover new claims, rose $8.7 billion in first-quarter 2014 to a record-high $662.0 billion, leaving no doubt that insurers are strong, well-capitalized, and well-prepared to pay future claims. Policyholders can rely on insurers to fulfill their obligations and help finance economic recovery even if we're struck this hurricane season by a storm more devastating than Superstorm Sandy or Hurricane Katrina," says Robert Gordon, PCI's senior vice president for policy development and research. "The experts are predicting the hurricane season this year will be relatively calm, but it only takes one powerful storm to disrupt millions of lives and cause tens of billions of dollars in damage. Moreover, millions of Americans live with the ever-present threat of a catastrophic earthquake or terrorist attack that could cause vast devastation and loss of life, while others of us live in locations at risk of being struck by wildfires, tornadoes, inland flooding, or other natural disasters. 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. Many businesses and individual consumers could also benefit from reviewing whether they have adequate insurance including flood and earthquake coverage."

 "Though insurers' net gains on underwriting in first-quarter 2014 were down from the levels experienced a year earlier, underwriting results remained unusually strong. Insurers posted net gains on underwriting for only 21 of the 113 quarters since the start of ISO's quarterly data, and insurers' 97.3 percent combined ratio for first-quarter 2014 was 7.7 percentage points better than the average since first-quarter 1986," says Michael R. Murray, ISO's assistant vice president for financial analysis. "Better-than-average underwriting profitability offset weakness in investment income, with insurers' 8.4 percent annualized overall rate of return for first-quarter 2014 equaling the average rate of return since the beginning of 1986. But 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. 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. 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."


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