Profits, profitability shrink in first quarter: ISO

It's not good news this year for private property/casualty insurers, as first quarter shows overall profitability slipping.

Insurance News


According to ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI), 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.

In addition, 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.

 Although the numbers are disappointing, Michael R. Murray, ISO's assistant vice president for financial analysis, did point out that underwriting remained healthy.

“Though insurers' net gains on underwriting in first-quarter 2014 were down from the levels experienced a year earlier, underwriting results remained unusually strong,” said Murray. “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.”

However, Murray did caution that underwriting could slip as premium growth slows and loss adjustment expenses continue to rise.

“With premium growth slowing and loss adjustment expenses surging upward in first-quarter 2014,” said Murray, “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, Murray added, 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.
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.
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.

Policyholders' surplus - insurers' net worth measured according to Statutory Accounting Principles - 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.

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