2015 - First Quarter Results

In the years since the Great Recession, the first-quarter benchmark for profitability in the property/casualty insurance industry was the first quarter of 2013, when net income after taxes reached $14.4 billion. And with the triad of the severe winter that afflicted much of the country in the first quarter of 2015, virtually no growth in the U.S. economy, and continuing historically low interest rates, it would have been reasonable to assume that profits would be constrained below that mark. Such an assumption would have been wrong. Not only did profits in 2015:Q1 exceed the previous high for a first calendar quarter, they did so by $3.8 billion, reaching $18.2 billion. Indeed, this is the highest first quarter net income in a generation (since ISO began quarterly reporting in 1986).


Despite the economic headwinds, the industry registered a respectable return on average surplus of 10.8 percent in the quarter, compared to 8.4 percent in the first quarter of 2014.


The industry results were released by ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).


Performance Drivers: The Usual Suspects

The industry’s performance the first quarter of 2015 was positive, in part because underwriting results were less affected by extreme winter weather in the U.S. than in the first quarter of 2014.  


A discussion of the key drivers of the quarter’s performance follows:


Premium Growth: Top Line Growth Continues

Premium growth in the first quarter of 2015—both written and earned premiums—grew by 3.7 percent over premium volume in the first quarter of 2014. Although this is slightly below the 4-plus percent growth rate of recent quarters, it is the 20th consecutive quarter of year-over-year premium growth—a streak that began in the second quarter of 2010, when the economy was barely beginning its recovery from the Great Recession.


There are two main drivers of premium growth in the property/casualty insurance industry: exposure growth and rate. Exposure growth—basically an increase in the number and/or value of insurable interests (such as property and liability risks)—is driven mainly by economic growth and development. The traditional measure of economic growth has been the quarterly seasonally adjusted real (inflation-adjusted) Gross Domestic Product (GDP) expressed at an annual rate. Economic growth in the U.S. in the first quarter of 2015 was virtually non-existent: both nominal and real GDP have been reported as a decline at an annual rate of -0.2 percent. These measurements are likely to change when the annual revision of the National Income and Product Accounts is published on July 30, but at best they likely will still show weak growth for the first quarter.


Recently some economists have questioned the accuracy of the GDP measurement and instead turned to Gross Domestic Income (GDI) which, in concept, measures the same thing from a different viewpoint. Real GDI in the first quarter of 2015 grew at a seasonally adjusted annual rate of 1.9 percent.


Whichever is the more accurate measure, economists expect a rebound in growth for the rest of 2015. For the full-year 2015, most forecasts currently see nominal GDP growth (not inflation-adjusted) ranging between 2.9 percent and 3.6 percent, and real GDP forecasts range from 2.0 percent to 2.5 percent.


Despite the effects of the harsh winter, first quarter strength in key areas of the economy such as new vehicle sales, residential construction, and consistent employment and payroll growth clearly benefitted the P/C insurance industry.


The other important determinant in industry growth is rate activity. Rates tend to be driven by trends in claims costs, conditions in the reinsurance market, marketing and distribution costs, and productivity from investments in technology, among other factors. Although it is challenging to foresee the interplay of all of these factors as well as macroeconomic factors, it is certainly possible that overall industry growth in net written premiums could keep pace with overall economic growth in 2015.


Job growth benefits the entire economy, of course, but the expansion of payrolls benefits workers compensation insurers in particular. The U.S. economy added 1.25 million nonfarm jobs in the first six months of 2015; if that rate is sustained, there will be over 2.5 million more workers by the end of the year than at the end of 2014. Combined with inflation-level increases in the hourly earnings of employees (as has been the case for the past few years), payrolls are expected to continue growing, resulting in billions of dollars in new premiums written being earned by workers compensation insurers in 2015. Indeed, workers compensation, hit hard during the recession by a soft market and a precipitous drop in payrolls, has within the span of just a few years transformed itself from the fastest contracting major property/casualty line to the fastest growing. Workers compensation is likely to remain the fastest growing major P/C line of insurance in 2015 if economic growth and hiring behave as projected.


Strong growth in the workers compensation line, continued growth in the residential construction sector, and strong new car sales are just a few of the reasons why moderate premium growth is likely to continue through 2015, overcoming modest headwinds from swooning energy prices and a flattening in manufacturing activity.


Catastrophe Losses and Underwriting Performance

Underwriting performance in the first quarter of 2015 was stronger than in the comparable quarter in 2014. Net underwriting gains were $4.1 billion in 2015:Q1 vs. $2.4 billion in 2014:Q1 (up 73.5 percent).


There are two main drivers of underwriting performance: losses and loss-adjustment expenses, and other underwriting expenses. Despite the harsh winter, losses and loss-adjustment expenses grew by only $1.4 billion (+1.7 percent) to $81.9 billion. Expense growth (at 3.5 percent) was roughly even with premium growth.


The improvement in underwriting performance in the first quarter of 2015 would have been even better but for catastrophe losses that were higher than last year. ISO/PCI estimates that 2015:Q1 catastrophe losses rose by $3.4 billion, compared to +$3.2 billion in 2014:Q1. Net losses for non-cat claims rose by $1.1 billion (+1.4 percent).


Reserve Releases

Reserve releases are generally associated with new estimates of expected costs for claims occurring in past years. Overall inflation continues to be remarkably low, likely contributing to these lower estimates, although prices for some items that comprise claims payouts have been increasing at higher rates. For the first quarter of 2015, the industry reported releases of prior year claims reserves totaling $5.7 billion, only slightly higher than the $5.4 billion released in 2014.


Combined Ratio: Underwriting Profits Continue

Driven by the small increase in losses and loss-adjustment expenses, and helped along by continuing reserve releases, the industry’s combined ratio for the first quarter improved to 95.7 in 2015:Q1 from 97.1 in the year-earlier quarter. From a long-term historical perspective, this is unusual: a quarter with an underwriting profit has happened, on average, only once every five quarters (24 times in the 117 calendar quarters—29 years plus a quarter—since ISO’s quarterly data began).


Combined ratios for the major sectors of the industry differed slightly. For insurers writing predominantly personal lines, the combined ratio improved 0.9 percentage points to 97.5 percent. For those writing mainly commercial lines (excluding mortgage and financial guaranty insurers), the combined ratio improved 0.4 percentage points to 94.7. And those writing balanced books of business posted combined ratios of 95.1, 2.9 percentage points better than in the year-earlier quarter.


Investment Performance: Improvement in Capital Gains and Investment Income

For the first quarter of 2015, net investment gains (which include net investment income plus realized capital gains and losses) rose by $2.3 billion (+16.0 percent) to $16.4 billion, compared to $14.1 billion in the first quarter of 2014. The $16.4 billion in net investment gains is a record for this category for first calendar quarters, at least since 1986.


In measuring insurance company net investment gains, accounting rules recognize two components: (i) net investment income; and (ii) realized capital gains or losses. Unrealized capital gains or losses are not considered income and affect only surplus on the balance sheet.


Net Investment Income in 2015:Q1

Net investment income itself has basically two elements: interest payments from bonds and dividends from stock. The industry’s net investment income for the first quarter of 2015 was $11.7 billion, compared to $11.2 billion in the first quarter of 2014 (up 4.6 percent). Most of this income comes from the industry’s bond investments, which are mainly high quality corporates and municipals.


Corporate bond market yields in the first quarter of 2015, as captured by Moody’s AAA-rated seasoned bond index, averaged 3.6 percent, compared to 4.4 percent in the first quarter of 2014. This reflects persistently low inflation, weak economic growth, and a growing belief that the Federal Reserve Board would hold down short-term interest rates longer into 2015 than was previously anticipated. These lower yields continued to shave income off the industry’s bond portfolio despite its growing size.


Although the U.S. economy is improving slowly, it still is beset by the same forces that have held interest rates down since the Great Recession ended (officially, in June 2009): unused capacity (in both capital resources and higher-than-normal unemployment); cautious consumer and business spending; low near-term future expectations for the economy; and Federal Reserve actions to keep short-term interest rates low, all of which contributed to low inflation expectations (and thus, low nominal bond yields).


The other significant source of net investment income (besides bond yields) is stock dividends. Stock dividends have been quite steady lately. Seasonally adjusted, net dividends in the past four calendar quarters (vs. the immediately preceding quarter) fell by -0.1 percent in 2014:Q2, fell by -0.4 percent in 2014:Q3, rose by 2.1 percent in 2014:Q4 and rose by 0.6 percent in 2015:Q1. When compared to the year-earlier quarter, stock holdings in 2015:Q1 were 2.2 percent higher. Stock holdings in general represent roughly only about one-sixth of the industry’s invested assets.


Realized Capital Gains

Realized capital gains in 2015:Q1 were $4.7 billion. This is a strong result, at least by recent historical standards. Realized capital gains in the first quarters of 2011-2014 were $1.0 billion, $0.7 billion, $1.4 billion, and $2.9 billion, respectively. Indeed, the $4.7 billion mark in realized capital gains in 2015:Q1 is the best result in the 30 first calendar quarters dating back to 1986 (when ISO began its quarterly tracking).


Policyholders’ Surplus (Capital/Capacity): Still Exceptionally Strong

Policyholders’ surplus as of March 31, 2015 slipped to $671.7 billion—down $3.0 billion from year-end 2014 but up $10.1 billion (+1.5 percent) from the year-earlier quarter.


Unrealized capital gains/losses were a major influence on changes in the level of surplus compared to prior periods. Industry balance sheets posted $6.2 billion in unrealized capital losses in the first quarter of 2015, compared to unrealized capital gains of $1.3 billion in the year-earlier quarter. This is a change of $7.5 billion and, while this was not the only factor affecting surplus, it was an important one.


Policyholders’ surplus is analogous to net worth at non-insurance firms, and as such is a source of dividends to shareholders. The first quarter of 2015 was kind to insurance company shareholders: dividends grew by $5.1 billion (up 69.1 percent) to $12.5 billion, from $7.4 billion in the first quarter of 2014.


One commonly-used measure of capital adequacy, the ratio of net premiums written to surplus, currently stands at 0.75, close to its strongest level in modern history. The bottom line is that the industry is extremely well capitalized and financially prepared to pay very large scale losses in 2015 and beyond.



The property/casualty insurance industry turned in a strong and profitable performance in the first quarter of 2015. In addition, policyholders’ surplus remained near a record high. Despite an unusually costly winter, weak economic growth and persistently low interest rates, the industry posted another profitable quarter aided by capital gains and reserve releases. Premium growth, while still modest, is now experiencing its longest sustained period of gains in a decade.


Fundamentally, the P/C insurance industry remains quite strong financially, with capital adequacy ratios remaining high relative to long-term historical averages.


A detailed industry income statement for the first quarter of 2015 follows.


To view the full report from ISO and PCI, click here.


($ billions)

  $ Billions
Net Earned Premiums $121.9
Incurred Losses (Including loss adjustment expenses) 81.9
Expenses 35.2
Policyholder Dividends 0.7
Net Underwriting Gain (Loss) 4.1
Investment Income 11.7
Other Items -0.4
Pre-Tax Operating Gain 15.6
Realized Capital Gains (Losses) 4.7
Pre-Tax Income 20.3
Taxes 2.1
Net After-Tax Income $18.17
Surplus (End of Period) $671.73
Combined Ratio 95.7**

*Figures may not add to totals due to rounding. Calculations in text based on unrounded figures.
**The combined ratio excluding Mortgage & Financial Guaranty insurance was 94.8.

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