Higher Losses Hit P&C Insurers in 2014; Results Still Strong
U.S. property and casualty insurers posted their second-highest yearly profit since the recession in 2014, but results deteriorated some compared to 2013 due in part to higher losses.
Net income after taxes in 2014 was $55.5 billion, down from $63.4 billion in 2013, according to an ISO and Property Casualty Insurers Association of America analysis. The drop was despite a 4.1% increase in net written premiums, to $496.6 billion.
The decline in net income, states the analysis, results from an $8.4 billion drop in pretax operating income over the period, to $55.6 billion. The operating-income decrease, in turn, is due to a $3 billion decrease in net gains on underwriting, a $1.2 billion drop in net investment income, and a $4.3 billion decline in “miscellaneous other income.”
Net gains on underwriting totaled $12.3 billion in 2014, compared to $15.2 billion in 2013. The analysis says, “Underwriting gains were not as robust in 2014 compared to the year prior as loss and loss-adjustment expenses (LLAE) exceeded premium growth.”
Losses primarily rose from causes other than catastrophes. While catastrophe losses were up $2.8 billion to $16.8 billion in 2014 compared to 2013 — primarily from cats in the U.S. — other LLAE climbed $16.9 billion to $317.9 billion, according to the analysis.
As a result of higher LLAE, the industry’s combined ratio grew to 97 in 2014, from 96.2 in 2013.
Lower cats, but for how long?
Commenting on the industry’s overall 2014 results, Beth Fitzgerald, president of ISO Insurance Programs and Analytic Services, says, “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.”
Robert Gordon, PCI’s senior vice president for policy development and research, also notes that insurers continue to benefit from low catastrophe losses.
Insurance Information Institute President Robert Hartwig, and Senior Vice President and Chief Economist Steven Weisbart, while acknowledging the role of moderate catastrophe losses, say in a statement, “The overall result in underwriting during 2014 was positive, with the industry’s combined ratio rising only slightly to 97.0 compared with 96.2 in 2013.”
Underwriting results in 2014 benefitted from $11.2 billion in favorable reserve development. Hartwig and Weisbart say that although reserve releases are down from $15.6 billion in 2013, much of the decline is from a tiny segment of the industry — mortgage and financial guaranty insurers — rather than an industrywide trend.
Policyholders’ surplus climbed $21.3 billion to a record-high $674.7 billion as of Dec. 31, 2014, from $653.4 billion at year-end 2013.
Hartwig and Weisbart conclude, “Fundamentally, the P&C insurance industry remains quite strong financially, with capital adequacy ratios remaining high relative to long-term historical averages.”
For the 2014 fourth quarter, The P&C industry’s consolidated net income after taxes fell to $17.8 billion from $20.7 billion in 2013’s fourth-quarter.
