22 April 2014 Insurance

US insurers make rare underwriting profit

The US property/casualty sector made an underwriting profit for the first time since 2007 last year largely on the back of premium growth and a drop in net losses. But insurers will need greater financial resources with losses from catastrophic events forecast to increase.

That is according to analysis by ISO, part of Verisk Analytics, and the Property Casualty Insurers Association of America (PCI). The companies noted that while a quiet hurricane season has boosted results, insurers will need to “bolster economic resiliency” before the next major natural catastrophe or terrorist attack occurs.

The sector’s net underwriting gains increased from a negative $15.4 billion in 2012 to a positive $15.5 billion. Its combined ratio improved from 102.9 percent in 2012 to 96.1 percent in the period.

Insurers’ overall profitability, as measured by their rate of return on average policyholders’ surplus, climbed to 10.3 percent from 6.1 percent, the highest level since 2007 when the sector posted a figure of 12.4 percent.

Net income after taxes grew to $63.8 billion in 2013 from $35.1 billion in 2012. Policyholders’ surplus, insurers’ net worth measured according to Statutory Accounting Principles, grew by $66.3 billion to a record $653.3 billion from $587.1 billion in 2012, largely as a result of insurers’ $63.8 billion in net income after taxes.

“The $66.3 billion increase in policyholders’ surplus to a record-high $653.3 billion at year-end 2013 is a testament to the strength and safety of insurers’ commitment to policyholders. Insurers are strong, well-capitalised, and well prepared to pay future claims,” said Robert Gordon, PCI’s senior vice president for policy development and research.

“The US marketplace emerged relatively unscathed from the hurricane season last year. But advanced risk models show that losses from catastrophic events will continue to increase, and insurers will need to keep on building their financial resources to protect policyholders and bolster economic resiliency before the next major event like Hurricane Katrina or the September 11 terrorist attack occurs.

“Insurers are taking the steps necessary to secure their financial commitments to consumers. We are also working with homeowners, businesses, and federal, state, and local officials to improve disaster readiness and mitigation to minimize future human tragedy and economic losses. Catastrophe planning and preparation continue to be critical watchwords for 2014.”

Michael Murray, ISO’s assistant vice president for financial analysis, said: “The swing to net gains on underwriting in 2013 is certainly welcome news for insurers, whose net investment income — primarily interest on bonds and dividends from stocks — peaked at $55.1 billion in 2007 but totalled just $47.4 billion last year as a consequence of the historically low investment yields brought about by the financial crisis, the Great Recession, and the economy’s slow recovery from those events.

“Insurers earned net gains on underwriting in just 12 of the 55 years from the start of ISO’s data in 1959 to 2013, with insurers posting cumulative net losses on underwriting amounting to $485.9 billion during that period. But with much of the improvement in underwriting results last year attributable to special developments including relatively benign weather, a sharp drop in catastrophe losses, and increases in reserve releases, one has to wonder just how sustainable the net gains on underwriting will prove to be.

“Other items clouding the outlook for underwriting results include insurers’ record-high policyholders’ surplus to the extent that it sheds light on insurers’ capacity to bear risk and the potential supply of insurance in competitive markets governed by the law of supply and demand.”

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