Continuing Profitability for P/C Insurers as Results Deteriorate

Private U.S. property/casualty insurers’ net income after taxes fell to $55.5 billion in 2014 from $63.4 billion in 2013, with insurers’ overall profitability as measured by their rate of return on average policyholders’ surplus dropping to 8.4 percent from 10.2 percent, according to ISO, a Verisk Analytics business and the Property Casualty Insurers Association of America (PCI).

Insurers’ combined ratio deteriorated from 96.2 percent in 2013 to 97.0 percent in 2014. Net written premium growth slowed slightly from 4.4 percent in 2013 to 4.1 percent in 2014. Policyholders’ surplus increased by $21.3 billion in 2014 to $674.7 billion.

“Property/casualty insurers had another moderately good year in 2014, with fourth-quarter results particularly strong,” said Robert Gordon, PCI’s senior vice president for policy development and research. “The industry’s profitability, premium growth, and underwriting ratios all performed better than long-term historical averages, and policyholders’ surplus reached record levels. However, while insurers are benefiting from continued low catastrophe losses, overall 2014 results deteriorated slightly from 2013 with insurers’ net income dropping 12.5 percent.”

“Right now, good underwriting results are a must for insurers. But with much of the improvement in underwriting results for the last two years attributable to moderate catastrophe losses and dependent on continued reserve releases, one has to wonder just how sustainable the net gains on underwriting will be,” said Beth Fitzgerald, president of ISO Insurance Programs and Analytic Services. “Advanced risk models suggest that losses from catastrophic events will continue to increase, and, therefore, those insurers who take advantage of predictive analytics should be better positioned to handle whatever the future might hold.”

Insurers’ net investment income – primarily interest on bonds and dividends from stocks – dropped 2.5 percent to $46.2 billion last year, down 16.2 percent from its peak of $55.1 billion in 2007.

“The drop in investment income is a result of historically low investment yields as the economy slowly recovers from the financial crisis and its aftermath,” Fitzgerald said.

The property/casualty industry’s results include the contribution of mortgage and financial guaranty (M&FG) insurers. Excluding M&FG insurers, the industry’s rate of return fell to 8.2 percent in 2014 from 9.8 percent in 2013.

Fourth-Quarter Results

The property/casualty insurance industry’s consolidated net income after taxes fell to $17.8 billion in fourth-quarter 2014, down $2.9 billion from $20.7 billion in fourth-quarter 2013. Property/casualty insurers’ annualized rate of return on average surplus fell to 10.6 percent in fourth-quarter 2014 from 13.0 percent a year earlier. Excluding M&FG insurers, the insurance industry’s annualized rate of return fell to 10.5 percent in fourth-quarter 2014 from 12.8 percent in fourth-quarter 2013 as net income after taxes dropped to $17.2 billion from $19.9 billion.

Net written premiums rose $5.5 billion, or 4.8 percent, to $119.6 billion in fourth-quarter 2014 from $114.1 billion in fourth-quarter 2013. The industry’s combined ratio improved to 94.9 percent in fourth-quarter 2014 from 97.2 percent in fourth-quarter 2013.

Source: ISO, PCI