Combined ratio and other trends

January 1, 2015 / 2 min read

Property/casualty insurers’ net income and overall profitability both declined in nine-months 2014

Private U.S. property/casualty insurers’ net income after taxes fell $5.1 billion to $37.7 billion in nine-months 2014 from $42.7 billion in nine-months 2013. Reflecting the decline in net income, insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus slipped to 7.6 percent in nine months 2014 from 9.4 percent in nine-months 2013.

Deterioration in underwriting results drove the drop in insurers’ net income, with net gains on underwriting falling to $4.3 billion in nine-months 2014 from $10.3 billion in nine-months 2013. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — worsened to 97.7 percent for nine months 2014 from 95.8 percent for nine-months 2013.

“The fall-off in underwriting results raises questions about the quality or sustainability of insurers’ earnings. Other factors raising questions about the quality or sustainability of earnings include the extent to which underwriting results benefited from favorable reserve development and the absence of hurricane losses,” said Michael R. Murray, ISO’s assistant vice president for financial analysis.

“The prospect that underwriting results could deteriorate further is a bit troubling because insurers’ rate of return is already subpar compared with long-term historical norms and because insurers now need much better underwriting results just to be as profitable as they were in the past,” added Murray. “Insurers’ 7.6 percent annualized rate of return for nine-months 2014 fell short of insurers’ 9.0 percent average rate of return for the 55 years from the start of ISO’s annual data in 1959 to 2013, even though the 97.7 percent combined ratio for nine-months 2014 was 6.1 percentage points better than the 103.9 percent average combined ratio for the past 55 years.”

Overall net written premiums grew 3.9 percent to $377.0 billion in nine-months 2014, with premium growth receding from 4.1 percent in nine-months 2013.

Net loss and loss adjustment expenses grew 7.4 percent to $253.1 billion in nine-months 2014, with this increase in loss and loss adjustment expenses following a 3.0 percent decline in nine-months 2013.

The weakness in premium growth was concentrated in commercial lines. Excluding mortgage and financial guaranty insurers, net written premiums for insurers writing predominantly commercial lines grew 2.9 percent in nine-months 2014. In contrast, premiums for insurers writing more balanced books of business rose 3.1 percent as premiums for insurers writing predominantly personal lines climbed 5.5 percent.

“With loss and loss adjustment expenses rising nearly twice as fast as premiums for the property/casualty industry as a whole, underwriting profitability deteriorated for all major sectors of the industry,” said Murray. “Excluding mortgage and financial guaranty insurers, commercial lines insurers’ combined ratio rose 1.8 percentage points in nine-months 2014 to 95.2 percent as balanced insurers’ combined ratio increased 1.0 percentage point to 100.1 percent and personal lines insurers’ combined ratio climbed 1.0 percentage point to 98.8 percent.”