Stronger Underwriting Improves P/C Insurers’ Bottom Line in First Half of 2013

Private U.S. property/casualty insurers’ net income after taxes rose to $24.5 billion in first-half 2013 from $17.2 billion in first-half 2012, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus increasing to 8.2 percent from 6.1 percent.

Insurers’ pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — grew to $25.8 billion in first-half 2013 from $19.2 billion in first-half 2012.

The increases in insurers’ pretax operating income, net income after taxes, and overall rate of return were driven by an $8.7 billion swing to $2.3 billion in net gains on underwriting in first-half 2013 from $6.4 billion in net losses on underwriting in first-half 2012. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 97.9 percent for first-half 2013 from 101.9 percent for first-half 2012, according to ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).

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

Insurers’ overall results for first-half 2013 also benefited from a $1.5 billion increase in net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — to $27.1 billion in first-half 2013 from $25.6 billion in first-half 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 $1.4 billion to $0.3 billion in first-half 2013 from $1.8 billion in first-half 2012, as insurers’ federal and foreign income taxes rose $1.5 billion to $5.2 billion from $3.7 billion.

Policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — grew $26.9 billion to $614 billion at June 30, 2013, from $587.1 billion at year-end 2012, largely as a result of insurers’ $24.5 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 first-half 2013 were certainly better than their results for first-half 2012, with insurers posting net gains on underwriting through six months for the first time since 2007. Nonetheless, insurers’ overall rate of return remained subpar compared with long-term historical norms, and insurers now need much better underwriting results just to be as profitable as they were in the past,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “Insurers’ 8.2 percent annualized rate of return on average surplus for first-half 2013 fell short of insurers’ 8.9 percent average overall rate of return for the 54 years from the start of ISO’s annual data in 1959 to 2012, even though the 97.9 percent combined ratio for first-half 2013 was 6.1 percentage points better than the 104 percent average combined ratio for the past 54 years. With investment yields, financial leverage, and tax rates like those in first-half 2013, ISO estimates that the combined ratio would have to improve another 1.2 percentage points to 96.7 percent for insurers to earn their long-term average rate of return.”

The property/casualty industry’s 8.2 percent annualized rate of return for first-half 2013 was the net result of negative 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 deteriorated to negative 7.7 percent for first-half 2013 from negative 4.3 percent for first-half 2012. Excluding M&FG insurers, the industry’s annualized rate of return rose to 8.5 percent in first-half 2013 from 6.3 percent in first-half 2012.

“The $26.9 billion increase in policyholders’ surplus to a record-high $614 billion at June 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. “Despite expert predictions that the 2013 hurricane season would be very active, we have been lucky so far. Superstorm Sandy didn’t strike until the last days of October 2012, and data from ISO’s Property Claim Services unit shows there have been 15 catastrophic fourth-quarter hurricanes since 1950, with 3 of those 15 occurring in the second half of November. This means that all of us — insurers, policyholders, first responders, and federal, state, and local officials — must be prepared to take the steps necessary to minimize the hardship and human suffering that will occur when a major storm makes landfall. Investing now in preparation and mitigation will save lives and reduce losses.”

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 $2.3 billion in first-half 2013 from negative $6.4 billion in first-half 2012 as premiums rose and LLAE declined.

Net written premiums rose $10.2 billion, or 4.5 percent, to $237.2 billion for first-half 2013 from $227.1 billion for first-half 2012. Net earned premiums rose $9.4 billion, or 4.3 percent, to $228.4 billion from $219 billion.

Net LLAE (after reinsurance recoveries) dropped $2.3 billion, or 1.5 percent, to $158 billion in first-half 2013 from $160.3 billion in first-half 2012.

The growth in premiums and decline in LLAE were partially offset by increases in other underwriting expenses and dividends to policyholders. Other underwriting expenses rose $2.8 billion to $67.1 billion in first-half 2013 from $64.3 billion in first-half 2012 as dividends to policyholders grew $0.2 billion to $1 billion from $0.8 billion.

The decrease in overall net LLAE was driven by a decline in catastrophe losses, with ISO estimating that private insurers’ net LLAE from catastrophes fell $2.7 billion to $9.9 billion in first-half 2013 from $12.6 billion in first-half 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 rose $0.4 billion, or 0.3 percent, to $148 billion through six-months 2013 from $147.6 billion through six-months 2012.

U.S. insurers’ $9.9 billion in net LLAE from catastrophes in first-half 2013 is 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 was near nil in first-half 2013.

According to ISO’s Property Claim Services (PCS) unit, catastrophes striking the United States in first-half 2013 caused $9.7 billion in direct insured losses (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers), down $4.7 billion compared with the $14.4 billion in direct insured losses caused by catastrophes striking the United States in first-half 2012 but $0.5 billion more than the $9.2 billion average for first-half direct catastrophe losses during the past ten years.

Reflecting the growth in premiums and the decline in LLAE, the combined ratio improved by 4 percentage points to 97.9 percent in first-half 2013 from 101.9 percent in first-half 2012.

“The drop in net LLAE from catastrophes accounts for about one-third of the improvement in underwriting results in first-half 2013, with the remainder primarily attributable to premium growth,” said Gordon. “More specifically, insurers’ combined ratio improved by 4 percentage points in first-half 2013, with the drop in net LLAE from catastrophes accounting for 1.2 percentage points of the improvement. The remaining 2.8 percentage points of improvement are largely due to premium growth.”

Underwriting results for first-half 2013 also benefited from $8.5 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. The $8.5 billion in favorable reserve development in first-half 2013 follows $7.2 billion in favorable development in first-half 2012. Excluding the $1.3 billion increase in favorable reserve development, net LLAE fell $1 billion, or 0.6 percent, to $159.3 billion in first-half 2013, and the combined ratio improved by 3.4 percentage points to 98.5 percent.

The $2.3 billion in net gains on underwriting in first-half 2013 amounted to 1 percent of the $228.4 billion in net premiums earned during the period, whereas the $6.4 billion in net losses on underwriting in first-half 2012 amounted to 2.9 percent of the $219 billion in net premiums earned during that period.

“Mortgage and financial guaranty insurers continued to suffer disproportionate losses on underwriting,” said Murray. “Though mortgage and financial guaranty insurers’ combined ratio dropped 48.4 percentage points to 130.6 percent for first-half 2013 from 179 percent for first-half 2012, their combined ratio for first-half 2013 was 33.1 percentage points worse than the 97.5 percent combined ratio for the industry excluding mortgage and financial guaranty insurers.”

M&FG insurers’ net written premiums increased 7.8 percent to $2.5 billion for first-half 2013 from $2.3 billion for first-half 2012, and their net earned premiums rose 2.5 percent to $2.9 billion from $2.8 billion. M&FG insurers’ underwriting results also benefited from a $1.4 billion, or 33.4 percent, decline in LLAE to $2.9 billion in first-half 2013 from $4.3 billion in first-half 2012. But M&FG insurers’ other underwriting expenses climbed 35.5 percent, or $0.2 billion, to $0.7 billion in first-half 2013 from $0.5 billion in first-half 2012.

Excluding M&FG insurers, industry net written premiums rose 4.4 percent in first-half 2013 to $234.8 billion, net earned premiums increased 4.3 percent to $225.5 billion, LLAE fell 0.6 percent to $155.1 billion, other underwriting expenses grew 4.1 percent to $66.4 billion, and dividends to policyholders climbed 25 percent to $1 billion. As a result, the combined ratio for the industry excluding M&FG insurers improved to 97.5 percent for first-half 2013 from 100.9 percent for first-half 2012.

“Growth in overall net written premiums accelerated to 4.5 percent in first-half 2013 from 3.7 percent in first-half 2012 and 2.7 percent in first-half 2011. First-half written premiums haven’t grown this rapidly since 2004, when first-half written premiums rose 5 percent compared with their level a year earlier,” said Murray. “But growth didn’t accelerate for all sectors of the property/casualty industry. Excluding mortgage and financial guaranty insurers, net written premium growth for insurers writing predominantly commercial lines slowed to 3.8 percent in first-half 2013 from 5.3 percent in first-half 2012. Conversely, net written premium growth for insurers writing mostly personal lines rose to 5 percent in first-half 2013 from 3 percent in first-half 2012 as premium growth for insurers writing more balanced books of business increased to 4.3 percent from 3.4 percent.”

“Underwriting profitability improved for all major sectors of the industry, reflecting the effects of premium growth and the drop in catastrophe losses,” said Gordon. “Excluding mortgage and financial guaranty insurers, commercial lines insurers’ combined ratio improved 4.7 percentage points to 93.7 percent as balanced insurers’ combined ratio improved 3.6 percentage points to 99.8 percent and personal lines insurers’ combined ratio improved 2.2 percentage points to 99.1 percent.”

Investment Results
Insurers’ net investment income — primarily dividends from stocks and interest on bonds — fell 2.8 percent to $23.2 billion in first-half 2013 from $23.9 billion in first-half 2012. But insurers’ realized capital gains on investments climbed $2.2 billion to $3.9 billion in first-half 2013 from $1.7 billion a year earlier. Combining net investment income and realized capital gains, overall net investment gains grew $1.5 billion, or 5.9 percent, to $27.1 billion for first-half 2013 from $25.6 billion for first-half 2012.

“The decline in insurers’ investment income reflects declines in market yields, with the annualized yield on insurers’ investments falling to 3.4 percent in first-half 2013 from 3.6 percent in first-half 2012. Insurers’ average holdings of cash and invested assets — the assets on which insurers earn investment income — actually rose 4.6 percent in first-half 2013 compared with their average holdings a year earlier,” said Murray. “Based on annual data, insurers’ investment yield last fell below 3.4 percent in 1967, when it was 3.3 percent. 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. 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 $3.9 billion in realized capital gains in first-half 2013 with $15.2 billion in unrealized capital gains during the same period, insurers posted $19.1 billion in overall capital gains for first-half 2013 — up $6.6 billion from $12.5 billion in overall capital gains for first-half 2012.

“Insurers’ overall capital gains for first-half 2013 reflect positive developments in financial markets. The New York Stock Exchange Composite rose 7.9 percent in first-half 2013 as the S&P 500 rose 12.6 percent, the NASDAQ Composite climbed 12.7 percent, and the Dow Jones Industrial Average increased 13.8 percent,” said Gordon. “Insurers’ investment results also benefited from a decrease in realized losses on impaired investments, which fell $1.3 billion to $0.6 billion in first-half 2013 from $1.9 billion in first-half 2012.”

Pretax Operating Income
Pretax operating income — the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income — grew $6.6 billion to $25.8 billion for first-half 2013 from $19.2 billion for first-half 2012. The $6.6 billion increase in operating income was the net result of the $8.7 billion swing to $2.3 billion in net gains on underwriting from $6.4 billion in net losses on underwriting, the $0.7 billion decline in net investment income, and the $1.4 billion decline in miscellaneous other income.

M&FG insurers’ operating income receded to negative $0.6 billion in first-half 2013 from negative $0.5 billion in first-half 2012. Excluding M&FG insurers, the insurance industry’s operating income climbed $6.7 billion to $26.4 billion for first-half 2013 from $19.8 billion for first-half 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-half 2013 totaled $24.5 billion — up $7.3 billion from $17.2 billion for first-half 2012. The $7.3 billion increase in net income was the net result of the $6.6 billion increase in operating income, the $2.2 billion increase in realized capital gains, and the $1.5 billion increase in federal and foreign income taxes.

M&FG insurers’ net income after taxes fell to negative $0.5 billion for first-half 2013 from negative $0.2 billion for first-half 2012. Excluding M&FG insurers, the insurance industry’s net income after taxes grew $7.5 billion to $25 billion for the six months ending June 30, 2013, from $17.5 billion for the six months ending June 30, 2012.

Policyholders’ Surplus
Policyholders’ surplus climbed $26.9 billion to $614 billion as of June 30, 2013, from $587.1 billion at year-end 2012. Additions to surplus in first-half 2013 included insurers’ $24.5 billion in net income after taxes, $15.2 billion in unrealized capital gains on investments (not included in net income), and $2.7 billion in new funds paid in. Those additions were partially offset by $11.9 billion in dividends to shareholders and $3.6 billion in miscellaneous other charges against surplus.

Insurers’ unrealized capital gains on investments rose to $15.2 billion in first-half 2013 from $10.8 billion in first-half 2012.

New funds paid in grew to $2.7 billion in first-half 2013 from $0.7 billion in first-half 2012.

Dividends to shareholders increased to $11.9 billion in first-half 2013 from $11.7 billion in first-half 2012.

The $3.6 billion in miscellaneous charges against surplus in first-half 2013 compares with $0.6 billion in miscellaneous additions to surplus in first-half 2012.

M&FG insurers’ surplus grew to $13.8 billion as of June 30, 2013, from $12.1 billion at year-end 2012. Excluding M&FG insurers, industry surplus rose $25.2 billion to $600.2 billion as of June 30 this year from $575 billion as of December 31, 2012.

“Using 12-month trailing premiums, the premium-to-surplus ratio dropped to 0.76 as of June 30, 2013, from 0.78 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 June 30 this year was 0.94 — down from 1.00 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 are exceptionally well capitalized, with insurers’ ample capacity to bear risk likely being the reason that recent firming in insurance markets has been so modest compared with previous cycles.”

Second-Quarter Results
The property/casualty insurance industry’s consolidated net income after taxes rose to $10.2 billion in second-quarter 2013, up $3.3 billion from $6.9 billion in second-quarter 2012. Property/casualty insurers’ annualized rate of return on average surplus increased to 6.7 percent in second-quarter 2013 from 4.8 percent a year earlier.

M&FG insurers’ annualized rate of return fell to negative 22.7 percent in second-quarter 2013 from positive 28.7 percent in second-quarter 2012 as their net income after taxes dropped to negative $0.8 billion from positive $0.8 billion. Excluding M&FG insurers, the insurance industry’s annualized rate of return increased to 7.3 percent in second-quarter 2013 from 4.3 percent in second-quarter 2012, as net income after taxes climbed to $11 billion from $6.1 billion.

The $10.2 billion in net income after taxes for the entire insurance industry in second-quarter 2013 was a result of $10 billion in pretax operating income and $2.5 billion in realized capital gains on investments, less $2.3 billion in federal and foreign income taxes.

The industry’s $10 billion in pretax operating income for second-quarter 2013 was up $2.8 billion, or 39.2 percent, from $7.2 billion for second-quarter 2012. The industry’s second-quarter 2013 pretax operating income was a result of $2.2 billion in net losses on underwriting, $11.8 billion in net investment income, and $0.5 billion in miscellaneous other income. Excluding M&FG insurers, pretax operating income for second-quarter 2013 amounted to $10.9 billion — up $4.4 billion, or 67.1 percent, from the $6.5 billion in pretax operating income for the industry excluding M&FG insurers in second-quarter 2012.

For the industry overall, net losses on underwriting shrank $4.1 billion to $2.2 billion in second-quarter 2013 from $6.3 billion in second-quarter 2012.

ISO estimates that the net LLAE from catastrophes included in private U.S. insurers’ financial results fell to $7.6 billion in second-quarter 2013 from $9.2 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 in second-quarter 2013 totaled $7 billion, down $3.8 billion from the $10.8 billion in direct insured losses caused by catastrophes that struck the United States in second-quarter 2012, according to ISO’s PCS unit.

Second-quarter 2013 net losses on underwriting amounted to 1.9 percent of the $115.4 billion in premiums earned during the period. Second-quarter 2012 net losses on underwriting amounted to 5.7 percent of the $111 billion in premiums earned during that period.

The industry’s combined ratio improved to 100.8 percent in second-quarter 2013 from 104.8 percent in second-quarter 2012. At 100.8, the second-quarter combined ratio had fallen to its lowest level since the 99.5 percent for second-quarter 2009 and was 4 percentage points below the 104.9 percent average for the second quarter based on quarterly records extending back to 1986.

The $2.2 billion in net losses on underwriting in second-quarter 2013 was after deducting $0.5 billion in premiums returned to policyholders as dividends, with dividends to policyholders up from $0.3 billion in second-quarter 2012.

Net written premiums rose $5.4 billion, or 4.7 percent, to $120 billion in second-quarter 2013 from $114.7 billion in second-quarter 2012, with second-quarter net written premiums growing at their fastest rate since the 5.1 percent for second-quarter 2004.

Net earned premiums grew $4.4 billion, or 4 percent, to $115.4 billion in second-quarter 2013 from $111 billion in second-quarter 2012, with second-quarter net earned premiums growing at their fastest rate since the 6.8 percent for second-quarter 2004.

Excluding M&FG insurers, net written premiums rose 4.7 percent in second-quarter 2013, net earned premiums rose 4 percent, LLAE fell 1.5 percent, and the combined ratio dropped to 100 percent from 104.2 percent in second-quarter 2012.

“In second-quarter 2013, the industry achieved its thirteenth successive quarter of growth in written premiums, following 12 quarters of declines,” said Gordon. “And earned premiums have now risen for 12 successive quarters, with the growth in earned premiums and the drop in catastrophe losses in second-quarter 2013 contributing to improvement in insurers’ overall results.”

The $11.8 billion in net investment income in second-quarter 2013 was down $0.4 billion, or 2.9 percent, from $12.1 billion in second-quarter 2012.

Miscellaneous other income fell to $0.5 billion in second-quarter 2013 from $1.4 billion in second-quarter 2012.

Realized capital gains on investments rose to $2.5 billion in second-quarter 2013 from $1 billion in second-quarter 2012.

Combining net investment income and realized capital gains, net investment gains grew $1.1 billion, or 8.5 percent, to $14.3 billion in second-quarter 2013 from $13.2 billion a year earlier.

Insurers posted $2 billion in unrealized capital gains on investments in second-quarter 2013 — a $4.7 billion swing from the $2.7 billion in unrealized capital losses on investments in second-quarter 2012. Combining realized and unrealized amounts, the insurance industry posted $4.6 billion in overall capital gains in second-quarter 2013 — a $6.2 billion swing from the $1.6 billion in overall capital losses on investments in second-quarter 2012.

The $4.6 billion in overall capital gains for second-quarter 2013 is after $0.2 billion in realized losses on impaired investments, with realized losses on impaired investments declining from $0.8 billion in second-quarter 2012.

Source: ISO/PCI