P/C Insurers’ Overall Results Improved in First Quarter 2013

Private U.S. property/casualty insurers’ net income after taxes rose to $14.4 billion in first-quarter 2013 from $10.2 billion in first-quarter 2012, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus climbing to 9.6 percent from 7.2 percent.

Insurers’ 9.6 percent first-quarter annualized rate of return approached the long-term average for the period. Since the start of ISO’s quarterly data in 1986, insurers’ first-quarter annualized rate of return has averaged 10 percent and has ranged from as low as negative 2.6 percent in 1994 to as high as 17.9 percent in 2005.

The increases in insurers’ net income and overall rate of return were driven by a $4.8 billion swing to $4.6 billion in net gains on underwriting in first-quarter 2013 from $0.1 billion in net losses on underwriting in first-quarter 2012, according to ISO, a Verisk Analytics company and the Property Casualty Insurers Association of America (PCI).

Insurers’ profits on underwriting were the first since fourth-quarter 2009. Insurers posted net gains on underwriting in 17 of the 109 quarters since the start of 1986, with insurers posting net losses on underwriting in the other 92. Including the net gains on underwriting in first-quarter 2013, insurers have lost $407.7 billion on underwriting cumulatively since the beginning of 1986.

The swing to net gains on underwriting in first-quarter 2013 reflects a combination of premium growth, increases in reserve releases, and a decline in weather-related catastrophe losses.

Insurers’ overall results for first-quarter 2013 also benefited from special developments that bolstered investment results. Net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — rose $0.4 billion to $12.8 billion in first-quarter 2013 from $12.3 billion in first-quarter 2012 as write-downs on impaired investments dropped. Excluding the decline in write-downs, net investment gains fell $0.2 billion.

Other items affecting insurers’ overall results for first-quarter 2013 include a decline in miscellaneous other income and an increase in federal and foreign income taxes. Insurers’ miscellaneous other income fell $0.5 billion to negative $0.1 billion in first-quarter 2013 from positive $0.4 billion in first-quarter 2012 as their federal and foreign income taxes rose $0.5 billion to $2.9 billion from $2.3 billion.

Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — grew to $15.9 billion in first-quarter 2013 from $11.9 billion in first-quarter 2012.

Reflecting insurers’ net income after taxes and unrealized capital gains on investments (not included in net income), policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — increased $20.9 billion to a record-high $607.7 billion at March 31, 2013, from $586.9 billion at December 31, 2012.

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.

Excluding changes in reserve releases, catastrophe losses, and write-downs on impaired investments as well as the estimated tax consequences of those changes, insurers’ net income after taxes grew $1.3 billion, or 12.6 percent, to $11.5 billion in first-quarter 2013, and insurers’ annualized overall rate of return rose 0.5 percentage points to 7.7 percent.

“With government, academic, and commercial forecasters all warning that this year’s hurricane season will be unusually bad, the insurance industry’s record-high $607.7 billion in policyholders’ surplus as of March 31 means that elected officials, regulators, and policyholders can all be confident that insurers have the financial resources necessary to fulfill their obligations — just as insurers did after Katrina, all through the financial crisis of 2008, and are now assisting our nation’s recovery from Sandy,” said Robert Gordon, PCI’s senior vice president for policy development and research. “The $20.9 billion increase in policyholders’ surplus in first-quarter 2013 underscores that insurers are strong, well capitalized, and well prepared to pay future claims.”

“The net gain on underwriting for the first quarter of this year is especially welcome given the toll that long-term declines in interest rates and investment leverage have taken on insurers’ ability to use investment earnings to balance underwriting losses,” said Michael R. Murray, assistant vice president for financial analysis at ISO. “Based on daily data since the start of 1962, the yield on ten-year Treasury notes fell from a record-high 15.84 percent on September 30, 1981, to a record-low 1.43 percent on July 25, 2012, and had only recovered to 2.41 percent as of June 20 this year. Reflecting the high interest rates of the 1980s and insurers’ investment leverage at the time, insurers’ overall rate of return during the decade averaged 10.3 percent, even though the combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — averaged 109.3 percent. Because of today’s interest rates and investment leverage, insurers’ 9.6 percent annualized overall rate of return for first-quarter 2013 was more than a half percentage point less than their average rate of return during the 1980s, even though the 94.8 percent combined ratio for first-quarter 2013 was more than 14 percentage points better than the average for that decade.”

ISO estimates that mortgage and financial guaranty (M&FG) insurers’ annualized rate of return on average surplus climbed to positive 8.5 percent in first-quarter 2013 from negative 37 percent in first-quarter 2012. Excluding M&FG insurers, the industry’s annualized rate of return climbed to 9.7 percent in first-quarter 2013 from 8.2 percent in first-quarter 2012.

Underwriting Results

Underwriting gains (or losses) equal earned premiums minus loss and loss adjustment expenses (LLAE), other underwriting expenses, and dividends to policyholders. Insurers swung to $4.6 billion in net gains on underwriting in first-quarter 2013 from $0.1 billion in net losses on underwriting in first-quarter 2012 as premiums rose and LLAE declined.

Net written premiums increased $4.6 billion, or 4.1 percent, to $117.1 billion in first-quarter 2013 from $112.5 billion in first-quarter 2012 as net earned premiums rose $4.8 billion, or 4.5 percent, to $112.9 billion from $108.1 billion.

Net LLAE (after reinsurance recoveries) dropped $1.4 billion, or 1.9 percent, to $74.2 billion in first-quarter 2013 from $75.6 billion in first-quarter 2012.

Partially offsetting the growth in premiums and the decline in LLAE, other underwriting expenses rose $1.5 billion, or 4.5 percent, to $33.5 billion in first-quarter 2013 from $32 billion in first‑quarter 2012.

Dividends to policyholders totaled $0.6 billion in first-quarter 2013, essentially unchanged from their level in first-quarter 2012.

The decrease in overall LLAE reflects favorable reserve development and associated reserve releases. Based on new information and updated estimates for the ultimate cost of old claims from prior accident years, insurers released $5.6 billion from reserves in first-quarter 2013, with reserve releases rising from $3.9 billion in first-quarter 2012. Excluding the increase in reserve releases, net LLAE rose $0.3 billion, or 0.3 percent, to $75.9 billion in first-quarter 2013, and the combined ratio improved by 2.7 percentage points to 96.3 percent.

The decrease in overall LLAE also reflects a decline in catastrophe losses. ISO estimates that private insurers’ net LLAE from catastrophes fell $1.1 billion to $2.3 billion in first-quarter 2013 from $3.4 billion in first-quarter 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. Noncatastrophe net LLAE fell $0.3 billion, or 0.5 percent, to $71.9 billion in first-quarter 2013 from $72.2 billion in first-quarter 2012, and the combined ratio for first-quarter 2013 would have been 95.8 percent if not for the decline in catastrophe losses.

For both first-quarter 2013 and first-quarter 2012, U.S. insurers’ net LLAE from catastrophes was primarily attributable to catastrophes that struck the United States. Though estimating U.S. insurers’ LLAE from catastrophes that occurred elsewhere around the globe is difficult, the available information suggests that U.S. insurers’ net LLAE for both periods included only negligible amounts from catastrophes that struck other nations.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in first-quarter 2013 caused $2.6 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers, foreign insurers, and foreign reinsurers, but excluding the National Flood Insurance Program and ocean marine losses), down $1 billion compared with the $3.6 billion in direct insured losses caused by catastrophes striking the United States in first-quarter 2012. At $2.6 billion, first-quarter direct losses from catastrophes were $0.2 billion above the $2.4 billion average for first-quarter direct catastrophe losses during the 10 years ending 2013.

Reflecting the growth in premiums and the decline in LLAE, the combined ratio improved by 4.1 percentage points to 94.8 percent in first-quarter 2013 from 99 percent in first-quarter 2012.

“Together, the increase in reserve releases and the drop in net LLAE from catastrophes account for more than half of the improvement in underwriting results,” said Gordon. “If not for those developments, LLAE would have risen by 1.8 percent in first-quarter 2013 instead of dropping 1.9 percent, and the combined ratio would have improved by only 1.7 percentage points to 97.3 percent instead of improving by 4.1 percentage points to 94.8 percent.”

The $4.6 billion in net gains on underwriting in first-quarter 2013 amounted to 4.1 percent of the $112.9 billion in net earned premiums during the quarter, whereas the $0.1 billion in net losses on underwriting in first-quarter 2012 amounted to 0.1 percent of the $108.1 billion in net earned premiums during that quarter.

M&FG insurers posted disproportionate improvement in underwriting results, with their combined ratio dropping to 95.1 percent in first-quarter 2013 from 217.5 percent in first-quarter 2012. Excluding M&FG insurers, the combined ratio improved by 2.7 percentage points to 94.8 percent in first-quarter 2013 from 97.5 percent in first-quarter 2012.

M&FG insurers’ net written premiums grew 8.1 percent to $1.2 billion for first-quarter 2013 from $1.1 billion for first-quarter 2012. Their net earned premiums rose 7.7 percent to $1.4 billion in first-quarter 2013 from $1.3 billion a year earlier. Also contributing to the improvement in M&FG insurers’ combined ratio, their loss and loss adjustment expenses fell 62.6 percent to $0.9 billion in first-quarter 2013 from $2.5 billion in first-quarter 2012. Conversely, M&FG insurers’ other underwriting expenses rose 2.1 percent to $0.4 billion in first-quarter 2013.

Excluding M&FG insurers, industry net written premiums rose 4.1 percent in first-quarter 2013 to $115.9 billion, net earned premiums increased 4.4 percent to $111.5 billion, LLAE rose 0.2 percent to $73.3 billion, other underwriting expenses grew 4.6 percent to $33.1 billion, and dividends to policyholders were essentially unchanged at $0.6 billion.

“Growth in overall net written premiums accelerated to 4.1 percent in first-quarter 2013 from 3 percent in first-quarter 2012. But growth didn’t accelerate for all sectors of the insurance industry,” said Murray. “Excluding mortgage and financial guaranty insurers, premium growth for insurers writing predominantly commercial lines slowed to 3.2 percent in first-quarter 2013 from 4.3 percent in first-quarter 2012. Conversely, premium growth for insurers writing a more balanced mix of commercial and personal lines climbed to 3.7 percent in first-quarter 2013 from 3.2 percent in first-quarter 2012 as premium growth for insurers writing predominantly personal lines accelerated to 5 percent from 2.5 percent.”

“Underwriting results improved for all major sectors of the industry, with results for commercial insurers improving far more than those of other insurers,” said Gordon. “Excluding mortgage and financial guaranty insurers, commercial lines insurers’ combined ratio dropped 6.2 percentage points to 91.1 percent in first-quarter 2013 as balanced insurers’ combined ratio receded 0.7 percentage points to 97.5 percent and personal lines insurers’ combined ratio fell 0.9 percentage points to 96.2 percent.”

Investment Results

Insurers’ net investment income — primarily dividends from stocks and interest on bonds — fell 2.3 percent to $11.4 billion in first-quarter 2013 from $11.7 billion in first-quarter 2012, but insurers’ realized capital gains on investments rose $0.7 billion to $1.4 billion in the first three months of 2013 from $0.7 billion a year earlier. Combining net investment income and realized capital gains, net investment gains increased $0.4 billion, or 3.4 percent, to $12.8 billion for first-quarter 2013 from $12.3 billion for first-quarter 2012.

Combining the $1.4 billion in realized capital gains in first-quarter 2013 with $13.1 billion in unrealized capital gains during the period, insurers posted $14.5 billion in overall capital gains for first-quarter 2013 — up $0.1 billion from the $14.4 billion in overall capital gains on investments for first-quarter 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 first-quarter 2013 from 3.5 percent in first-quarter 2012, as the 12-month moving average yield on ten-year U.S. Treasury notes dropped to 1.8 percent from 2.4 percent,” said Gordon. “Insurers’ average holdings of cash and invested assets — the assets on which insurers earn investment income — actually rose 3.9 percent in first-quarter 2013 compared with their level a year earlier. Prospectively, we may see some further weakness in investment income as insurers reinvest funds from older, higher-yielding bonds at the rates now available.”

“Insurers’ $14.5 billion in overall capital gains in first-quarter 2013 reflects developments in financial markets, with the New York Stock Exchange Composite rising 7.9 percent during the quarter as the Nasdaq Composite rose 8.2 percent, the S&P 500 increased 10 percent, and the Dow Jones Industrial Average climbed 11.3 percent,” said Murray. “But the reported changes in realized capital gains and net investment gains both benefited from a decline in write-downs on impaired investments, which dropped $0.6 billion to $0.4 billion in first-quarter 2013 from $1.1 billion in first-quarter 2012. Excluding write-downs, realized capital gains were essentially unchanged in first-quarter 2013, and net investment gains fell $0.2 billion to $13.2 billion.”

Pretax Operating Income

Pretax operating income climbed $4 billion, or 33.8 percent, to $15.9 billion for first-quarter 2013 from $11.9 billion for first-quarter 2012. The $4 billion increase in operating income was the net result of the $4.8 billion swing to $4.6 billion in net gains on underwriting from $0.1 billion in net losses on underwriting, the $0.3 billion decline in net investment income, and the $0.5 billion decrease in miscellaneous other income.

M&FG insurers’ operating income swung to positive $0.3 billion in first-quarter 2013 from negative $1.2 billion in first-quarter 2012. Excluding M&FG insurers, the insurance industry’s operating income rose $2.5 billion, or 18.8 percent, to $15.6 billion for first-quarter 2013 from $13.1 billion for first-quarter 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 first-quarter 2013 totaled $14.4 billion — up from $10.2 billion for first-quarter 2012. Net income rose $4.2 billon in first-quarter 2013 as a result of the $4 billion increase in operating income and the $0.7 billion increase in realized capital gains, which were partially offset by the $0.5 billion increase in federal and foreign income taxes.

M&FG insurers’ net income after taxes increased to positive $0.3 billion for first-quarter 2013 from negative $1.1 billion for first-quarter 2012. Excluding M&FG insurers, the insurance industry’s net income after taxes rose $2.8 billion to $14.1 billion for first-quarter 2013 from $11.3 billion for first-quarter 2012.

Policyholders’ Surplus

Policyholders’ surplus climbed $20.9 billion, or 3.6 percent, to $607.7 billion as of March 31, 2013, from $586.9 billion at year-end 2012. Additions to surplus in first-quarter 2013 included insurers’ $14.4 billion in net income after taxes, $13.1 billion in unrealized capital gains on investments (not included in net income), and $1.4 billion in new funds paid in. Those additions were partially offset by $4.9 billion in dividends to shareholders and $3.1 billion in miscellaneous other charges against surplus.

Unrealized capital gains on investments dropped to $13.1 billion in first-quarter 2013 from $13.7 billion in first-quarter 2012.

New funds paid in rose to $1.4 billion in first-quarter 2013 from $0.3 billion in first-quarter 2012.

Dividends to shareholders fell to $4.9 billion in first-quarter 2013 from $6.5 billion in first-quarter 2012.

The $3.1 billion in miscellaneous charges against surplus in first-quarter 2013 compares with $2.4 billion in miscellaneous additions to surplus in first-quarter 2012.

Edited to exclude any excess of liabilities over assets at individual M&FG insurers, surplus for the M&FG segment grew to $13.4 billion as of March 31, 2013, from $12.4 billion at year-end 2012. Excluding M&FG insurers, industry surplus increased $19.8 billion to $594.3 billion as of March 31, 2013, from $574.5 billion as of December 31, 2012.

“Using 12-month trailing premiums, the premium-to-surplus ratio as of March 31, 2013, was 0.76 — equal to the record-low 0.76 for full-year 2010 based on annual data extending back to 1959 and only a little more than 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 March 31, 2013, was 0.94 — far below the 1.40 average LLAE-reserves-to-surplus ratio for the past 54 years,” said Murray. “To the extent that these leverage ratios shed light on the amount of risk supported by each dollar of surplus, insurers appear to be extremely well capitalized at this point, and that is good news given the experts’ dire predictions for the hurricane season this year.”

Source: ISO/PCI