For the property/ casualty (P/C) insurance industry, 2017 was a year of good news and bad news. Premium revenue grew nicely for personal lines, but not for commercial lines. Non-catastrophe (CAT) claims were nearly flat, but CAT-related claims costs soared. Both investment income and realized capital gains rose, but the gains were partially offset by a massive underwriting loss. The industry posted a $36.1 billion profit, but it was 15.8 percent lower than the $42.9 billion profit for the full year 2016. In the context of the last 20 years (adjusted for inflation), the 2017 profit is below the median (Figure 1). Expressed as a percentage of net worth (measured as average surplus, for P/C insurers), the industry posted a 5.0 percent mark for 2017, down from 6.2 percent in 2016.
The industry nevertheless posted a relatively-strong 4.6 percent net written premium growth (compared to 2.7 percent in 2016). Buoyed by a strong stock market, overall industry capacity (policyholder surplus) rose to $752.5 billion as of December 31, 2017 vs. a year ago (up 7.4 percent). This is a new peak for industry surplus (Figure 2).
The industry results were released by ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).
Insurance performance and profitability drivers
Premiums: Top Line Growth Continues
P/C insurers measure premium income in two ways, each of which gives a different insight into the industry’s activity. Net written premiums are calculated by subtracting the amounts insurers pay for reinsurance from direct premiums, and are therefore a simple gauge of the net amount of risk that insurers planned to assume. Net earned premiums are derived by adjusting net written premiums to reflect the insurance actually provided.
Net written premiums in 2017 rose by $24.2 billion, or 4.6 percent, to $552.6 billion from the prior year. The rate of increase in net written premiums had been trending down for several years (Figure 3), due mainly to soft markets in the commercial lines, but a stronger economy increased the exposure base. However, net earned premium growth slowed in 2017 (up by 3.3 percent to $540.6 billion) compared to 2016 (3.5 percent growth over 2015).
There are two main drivers of premium growth in P/C insurance: 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 determined mainly by inflation and by the health and growth of the U.S. economy (including factors such as population growth, age composition, household formation, housing preferences and more). By most measures, inflation continued to be remarkably low; the Consumer Price Index for 2017 was 2.1 percent. As noted, real (inflation-adjusted) GDP growth in 2017 was 2.3 percent, although the annual rate masked starts and stops during the year (the 2017:Q1 real growth rate was 1.2 percent; 2017:Q2 was 3.1 percent; 2017:Q3 was 3.2 percent; 2017:Q4 was 2.9 percent, all expressed at seasonally-adjusted annual rates).
Exposure growth in key areas of the economy, such as new vehicle sales (at near-record levels), business investment, industrial production, construction and overall employment growth, raised the value of exposures covered by the P/C insurance industry. With real GDP growth expected (at this writing) to continue at a moderate-to-strong pace in 2018 (in the range of 2.5 to 3.1 percent), and the Consumer Price Index expected to continue in the range of 2.3 to 2.7 percent, nominal values of personal and commercial lines exposures—and the premiums they generate—should continue to rise in the 5 to 6 percent range. Beyond that, the growth rate of premiums for personal lines and commercial lines will depend on rate changes.
Continuing improvement in labor market conditions in 2017 also aided top line growth in the P/C insurance industry. Job growth benefits the entire economy, of course, but it directly affects workers compensation insurers. The number of people employed in full-time jobs (seasonally adjusted) rose steadily through 2017 (to 126.7 million at year-end) and was up another 0.69 million by the end of the first quarter of 2018.
Including pay raises for continuing workers, payrolls rose 3.3 percent in 2017 over 2016 (Figure 4), driving billions of dollars in new premiums for workers compensation coverage in 2017. Job growth is likely to continue, though at a somewhat slower pace. Economists believe that the economy is getting close to full employment, but there still appears to be slack in the labor market (for example, the number of “involuntary part-time” workers is still about one million above its typical level for prosperous times). If economic growth and hiring continue as projected, workers compensation exposure is likely to remain among the faster growing major commercial P/C lines of insurance in 2018.
The other major determinant of industry premium growth is rate activity. Rates are a function of a number of forces, but perhaps the most important is expected future claims. Net of reinsurance recoveries but excluding the effect of reserve releases, incurred losses and loss adjustment expenses for all lines in 2017 rose to $419.1 billion, up 9.7 percent from $382.1 billion in 2016. Overall, the growth in claims expenses (losses and loss adjustment expenses) far outpaced the growth in premiums for the second straight year. This suggests that, at least in some lines of insurance, rates for coverage provided in 2017 insufficiently anticipated claims that occurred.
ISO/PCI reported that premium growth in 2016 was significantly different for the personal lines vs. commercial lines sectors. Insurers writing primarily personal lines saw net written premium grow 6.7 percent—up from 6.0 percent in 2016. Insurers writing primarily commercial lines saw net written premium growth in 2017 of 3.3 percent, vs. -1.5 percent in 2016. (Figure 5). Those with balanced books of business saw net written premium growth of 2.6 percent.
The industry’s overall underwriting loss in 2017 was $23.2 billion. This is the difference between earned premiums on the one hand, and the sum of incurred losses, expenses and dividends to policyholders on the other. For perspective, the industry recorded an underwriting loss in 2016 as well, but only $4.7 billion, and underwriting profits in 2013, 2014 and 2015.
Another widely used industry metric for gauging overall insurance operations (excluding investment performance) is the combined ratio. The combined ratio is the sum of three percentages: losses and loss adjustment expenses as a percent of earned premiums; policyholder dividends as a percent of earned premiums; and other expenses as a percent of written premiums. In 2017 this ratio was 103.7, and in 2016 it was 100.6. Any number over 100 means that, considering all lines of business together, insurers paid out more than they took in as premiums for insurance they provided. As Figure 6 shows, a combined ratio of 103.7 is unusually high—exceeded in the last 15 years only twice.
Most of the “blame” for negative underwriting performance in 2017 can be attributed to catastrophe losses (as in years like 2011 and 2012). Back in the 1990s, in most years CATs produced claims in the $5 billion to $12 billion range (in 2017 dollars). To have $15 billion in CAT claims was unusually high. In the last 17 years CAT losses reached or exceeded $30 billion seven times and were in the range of $15 billion to $23 billion another five times. In 2017 ISO estimates total U.S. CAT claims to be $53.3 billion, compared to $23.3 billion in 2016.
In contrast, non-CAT claims rose at a slower rate than premiums: They were up by 0.5 percent, from $355.0 billion in 2016 to $356.8 billion in 2017.
Claims reserve releases
Each year insurers reassess the adequacy of their reserves for future payments of past incurred claim obligations on current and prior policies. When it is determined that these reserves are higher than needed to cover these obligations, reserves are released. This is called favorable development. In 2017 it totaled $9.0 billion, a notable increase from the $3.8 billion in reserve releases in 2016, according to ISO/PCI. To show how variable this element is, note that in 2015 the industry released $8.0 billion in reserves. By lowering estimates for incurred claims, reserve releases improve underwriting results and, all other things equal, bolster profits (or offset losses). Accordingly, a larger reserve release in 2017 than in 2016 contributed to a smaller underwriting loss in 2017 than would otherwise have been posted.
Investment performance: Interest rates remain low
For the full year 2017, net investment gains at $64.06 billion were sharply higher (by $10.15 billion, or 18.8 percent) than the $53.91 billion of gains in 2016. 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 2017
Net investment income itself has basically two elements: interest payments from bonds, and dividends from stock. The industry’s net investment income for the full year 2017 was $49.0 billion, compared to $46.6 billion in 2016 (+5.1 percent). Most of this income comes from the industry’s bond investments, which are mainly high quality corporates and municipals.
The environment for bond investing in 2017 was challenging. Average monthly corporate bond market yields in 2017, as captured by Moody’s AAA-rated seasoned bond index, dropped fairly steadily each month, from 4.83 percent in January 2017 to 4.22 percent in December.
The other significant source of net investment income (apart from bond yields) is stock dividends. In 2017 market-wide net dividends from all common and preferred stock were effectively flat ($988 billion at a seasonally-adjusted annual rate in the first quarter, $994 billion and $998 billion in the second and third quarters, and $979 billion in the fourth quarter). For the industry on average stock holdings constitute roughly only about 22 percent of the industry’s invested assets.
Realized capital gains
The broad stock market’s total return was 21.1 percent in 2017, providing ample opportunities for capital gains. In addition, as noted above, bond yields declined during the year, offering the possibility of realizing capital gains on higher-yielding bonds. Realized capital gains in 2017 were $15.1 billion, compared to $7.3 billion in 2016. However, these numbers are distorted by a single capital gains transaction by one insurer that yielded $9.1 billion in realized gains.
Policyholders’ surplus (capital or capacity)
Policyholders’ surplus as of December 31, 2017, stood at $752.5 billion, up $51.7 billion from year-end 2016. This is the highest dollar measure of policyholder surplus. The industry is, and will remain, extremely well capitalized and financially prepared to pay very large scale losses in 2018 and beyond. One commonly used measure of capital adequacy, the ratio of net premiums written to surplus, at year-end 2017 stood at 0.73 (lower numbers are stronger), perhaps its strongest level in modern history.
The P/C insurance industry turned in a modest performance in 2017 in terms of overall return on average surplus (profitability). In addition, policyholders’ surplus set an all-time record high. Premium growth 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 2017 follows.
To view the full report from ISO and PCI, click here.
Full-Year 2017 Financial Results
|Net Earned Premiums
|Incurred Losses (Including loss adjustment expenses and reserve releases)
|Net Underwriting Gain (Loss)
|Pre-Tax Operating Income
|Realized Capital Gains (Losses)
|Net After-Tax Income
|Surplus (End of Period)
*Figures may not add to totals due to rounding. Calculations in text based on unrounded figures.