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Combined ratio and other trends Q1 2014

Insurers’ profits and profitability slipped in first-quarter 2014 as underwriting results deteriorated

U.S. property/casualty insurers’ net income after taxes fell to $13.8 billion in first-quarter 2014 from $14.3 billion in first-quarter 2013, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus falling to 8.4 percent from 9.6 percent.

Driving the declines in overall profits and profitability, net gains on underwriting fell $2.3 billion to $2.2 billion in first-quarter 2014 from $4.5 billion in first-quarter 2013. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — deteriorated to 97.3 percent for first-quarter 2014 from 94.9 percent for first-quarter 2013.

Net gains on underwriting dropped as premium growth slowed and net loss and loss adjustment expenses (LLAE) surged upward, with quarterly LLAE rising for the first time since Superstorm Sandy struck in fourth-quarter 2012.

Growth in net written premiums slowed to 3.6 percent in first- quarter 2014 from 4.3 percent a year earlier as growth in net earned premiums slowed to 4.3 percent from 4.6 percent.

Outpacing the growth in premiums, LLAE rose 8.6 percent in first-quarter 2014, with the increase in first-quarter 2014 following a 1.5 percent decline in first-quarter 2013.

Growth slowed and underwriting results deteriorated for all major segments of the industry, though growth held up relatively well for personal lines insurers.

Excluding mortgage and financial guaranty insurers, net written premium growth for insurers writing predominantly commercial lines slid 0.8 percentage points to 2.0 percent in first-quarter 2014 as premium growth for insurers writing more balanced books of business slipped 0.7 percentage points to 3.4 percent. In contrast, premium growth for insurers writing mostly personal lines receded just 0.1 percentage point to 5.4 percent in first-quarter 2014.

Commercial lines insurers’ combined ratio rose 4.1 percentage points in first-quarter 2014 to 95.5 percent as balanced insurers’ combined ratio increased 0.6 percentage points to 98.2 percent and personal lines insurers’ combined ratio climbed 2.3 percentage points to 98.5 percent.

“Underwriting results deteriorated but nonetheless remained unusually strong. Insurers posted net gains on underwriting for only 21 of the 113 quarters since the start of ISO’s quarterly data, and insurers’ 97.3 percent combined ratio for first-quarter 2014 was 7.7 percentage points better than the average since first-quarter 1986,” said Michael R. Murray, ISO’s assistant vice president for financial analysis. “Better-than-average underwriting profitability offset weakness in investment income, with insurers’ 8.4 percent annualized overall rate of return for first-quarter 2014 equaling the average rate of return since the beginning of 1986.”

Combined ratio: First-quarter 2007 to first-quarter 2014

Combined ratio chart Q1 2014
Click to enlarge

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