2019 - Commentary on first half financial results



Compared to the first half of 2018, net premium written in the first half of 2019 rose slightly (up 1.0 percent), and net premium earned rose more (up 3.8 percent) but losses and loss adjustment expenses rose somewhat faster (up 5.7 percent). Still, the industry posted statutory underwriting gains again ($5.4 billion), although down from the first half of 2018 ($6.0 billion). Net investment gains in 2019:1H ($31.2 billion) were just below 2018:1H ($32.2 billion). Net income after taxes, while still strong ($32.8 billion), was down slightly from 2018:1H ($34.0 billion). Surplus—capacity to accept unexpected claims—rose by 5.4 percent, passing the $800 billion mark ($802.2 billion). Industry results were released by ISO, a Verisk Analytics company, and the American Property Casualty Insurers Association (APCIA). A discussion of the key drivers of this first-half performance follows.

Underwriting performance

Premium income

P/C insurers measure premium income in three ways, each of which gives a different insight into the industry’s activity.

  • Direct premiums are the amounts that policyholders pay. This is a basic gauge of “retail” activity.
  • Net premiums written are calculated by subtracting amounts insurers pay for reinsurance from direct premiums; they are therefore a simple gauge of the net amount of risk that insurers plan to assume.
  • Net earned premiums are derived by adjusting net premiums written to reflect insurance that was actually provided. 

In general, premiums may grow for several reasons. A main reason is growth in the number of, and/or value of, insurable interests (such as property and liability risks). This could be driven by growth in the economy (such as new or expanded business or personal assets or income) and/or by price increases (inflation). So for premium growth an appropriate measure of U.S. economic growth is nominal (not inflation-adjusted) GDP (Figure 1). Both economic growth and inflation were present in 2019:1H. Taken together, the economy grew by 4.3 percent in the first half of 2019 compared to the first half of 2018.

Figure 1

Figure 1
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ISO estimates that direct premiums written grew by about 4.4 percent in the first half of 2019 compared to 6.0 percent in the first half of 2018.

Figure 2 shows three types of business investment, all of which would imply increases in the purchase of commercial insurance. Also, those who financed new cars or homes had to purchase insurance coverage to satisfy the conditions of their loans.

Figure 2

Figure 2
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Slower growth appeared to affect net premiums written (for insurance subsequently to be provided) in 2019:1H, which rose by 1.0 percent (to $315.1 billion), compared to the 13.2 percent spike in the first half of 2018 (to $312.0 billion). However, the 2018 spike was caused by a one-time consequence of the Tax Cuts and Jobs Act that took effect at the start of 2018. The new law motivated some insurers to cede less reinsurance to their non-U.S. affiliates, which made year-to-year comparisons of net premiums written misleading.

Net earned premiums (for insurance actually provided) in 2019:1H grew by 3.8 percent (to $304.0 billion), compared to growth of 10.1 percent (to $292.7 billion) in the same period in 2018. However, net earned premiums  were also affected by the changes in reinsurance practices caused by the Tax Cuts and Jobs Act.

But the stimulus effects of the Tax Cuts and Jobs Act are wearing off. Other one-time acts, such as the Federal Reserve’s two (so far in 2019) quarter-percentage-point cuts in the shortest-term interest rates, were taken to offset some signs that U.S. economic growth is slowing. The slowdown seems to be more on the commercial, not the personal, side of the economy. For example, in the second quarter of 2019, personal consumption expenditures rose at a 4.7 percent annual rate, but industrial production fell at a 2.1 percent annual rate.

Correspondingly, different segments of the industry saw markedly different premium flows. Net premiums written growth for insurers writing mainly personal lines (mostly auto and homeowners insurance) was up 4.0 percent in 2019:1H. In contrast, net premiums written for insurers writing mainly commercial lines, excluding mortgage and financial guaranty insurers, dropped by 3.2 percent in 2019:1H. And insurers writing mainly balanced books of business saw net premiums written grow 2.4 percent.

Incurred claims

Incurred losses and loss-adjustment expenses in 2019:1H rose by 5.7 percent (to $212.6 billion) versus the comparable prior period in 2018:1H. Although this is a significant increase, it is a slightly smaller rise than the 5.9 percent increase in the first quarter of 2019 over the first quarter of 2018. So, second quarter results slightly tempered first quarter results.

Incurred claims can be classified as catastrophe-related and non-catastrophe-related. In 2019:1H, incurred catastrophe-related claims were $13.7 billion, and non-catastrophe-related claims were $198.8 billion. In most years, as Figure 3 shows, catastrophe-related claims in the first half of the year are between 6 percent and 8 percent of total claims, but they can be quite volatile. This is in part because the second calendar quarter is the prime season for tornadoes, so an active tornado year can spike catastrophe claims. In the first half of 2019, catastrophe-related losses were 6.45 percent of total claims.

There were 1,065 tornadoes in the second quarter of 2019. This is more than double the number in the second quarter of 2018 (478) and half again as many as in the second quarter of 2017 (685), but sharply below the record second quarter of 2011 (1,422).

Incurred claims as of the first half of the year have been growing steadily in dollar amounts over the last decade. Of course this in part reflects inflation of the prices of materials and services needed to compensate policyholders for losses. It also indicates the increasing amounts of insurance provided, as measured by growth in net premiums earned. This comparison is the loss ratio; it was 69.9 percent in 2019:1H, and in recent years it was as high as 73.1 percent in 2017 and as low as 68.7 percent in 2018.

Figure 3

Figure 3
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Note that these numbers are net of reserve releases, discussed next.

Reserve releases

Reserve releases are generally associated with new estimates of expected costs for unsettled claims from past years. Overall inflation continues to be unexpectedly low, likely contributing to these new lower estimates. For the first half of 2019, the industry reported releases of prior-year claims reserves totaling $5.7 billion, down from $9.6 billion released in the first half of 2018.

Combined ratio and underwriting profits

The broadest conventional measure of underwriting results is the combined ratio—the percentage of losses, loss-adjustment expenses, and all other non-investment expenses—outgo—to premiums—income. A ratio more than 100 means insurance operations were unprofitable; one under 100 indicates profit. For the first half of 2019, the P/C industry combined ratio was 97.3. The comparable figure for 2018 was 96.2.

The industry’s overall net (of policyholder dividends) statutory underwriting gain of $5.4 billion in the first half of 2019 compares to an underwriting gain of $6.0 billion for the first half of 2018. However, quarterly underwriting gains are rare. In historical perspective, underwriting losses have been the norm over the past several decades. According to ISO, underwriting profits have occurred in only about 1 in every 6 calendar quarters since 1986, when ISO’s quarterly data began. As Figure 4 shows, the net underwriting gain for 2019:1H is the second largest in a first-half in the last dozen years.

Figure 4

Figure 4
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Different segments of the industry had different underwriting experiences. The combined ratio for insurers writing mainly personal lines (mostly auto and homeowners insurance) was 97.2 in 2019:1H.

Since the housing bubble burst in 2008, for a few years the mortgage & financial guarantee (M&FG) sector of the P/C industry disproportionately weighed down overall industry results, and because this line of business is written by only a few companies—some of them monoline carriers—it became common to report commercial lines insurers’ results excluding M&FG data. This continues to be the case, even though the line has returned to profitability. As a result the combined ratio for insurers writing mainly commercial lines excludes mortgage and financial guaranty insurers and was was 96.2. And insurers writing mainly balanced books of business experienced a combined ratio of 100.3 in 2019:1H.

Investment performance

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. For the first half of 2019, net investment gains were $31.2 billion, compared to $32.2 billion in the first half of 2018.

Net investment income

About two-thirds of investments of P/C insurers are in bonds, of which roughly 95 percent are investment grade. As Figure 5 shows, yields on seasoned AAA bonds, the highest quality, have since mid-2014 ranged between 3.3 percent and 4.1 percent. The portfolio yields obtained have tended to run about one-half to one percentage point lower.

Figure 5

Figure 5
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The industry’s net investment income for the first half of 2019 was $26.9 billion, just $0.1 billion more than in the first half of 2018. Net investment income itself has basically two elements—interest payments from bonds and dividends from stock. As shown in Figure 5, bond yields dropped throughout 2019:1H.

Stock holdings represent roughly about one-fifth of the industry’s invested assets. In the first half of 2019, stock dividends were up 4.2 percent over the first half of 2018 (which was, itself, a strong stock-dividend period).

Realized capital gains

Realized capital gains in 2019:1H were $4.3 billion. This is $1 billion below the 2018:1H result. As Figure 6 shows, a $4.3 billion gain is the fourth-highest result for a first-half-year since 2007. Strong stock market gains in the first quarter of 2019 and continued gains in the second quarter provided opportunities for realizing capital gains.

Figure 6

Figure 6
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Profit performance

Figure 7 shows the relative contribution to profits (before taxes) of the underwriting aspect of the business and the investment aspect.

Figure 7

Figure 7
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Putting performance into context can be challenging; one must determine what context is most helpful. For example, in assessing profit performance, we could use either the last dozen years or the last five. If we use the last dozen, the first half of 2019 was nearly as good as the first half of 2018 and 2015—the two most profitable first halves in the last dozen years. But if we use the last five years, profitability in the first half of 2019 was a median—higher than two and lower than two (Figure 8).

Figure 8

Figure 8
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Policyholders’ surplus (capital/capacity)

Policyholders’ surplus is the excess of assets over liabilities. Liabilities include both claims reserves and unearned premium reserves. Surplus, therefore, is a buffer that absorbs demands for claims and/or returned premiums that are beyond expectations.

As of June 30, 2019, policyholders’ surplus stood at $802.2 billion—up $41.0 billion (+5.4 percent) from the year-earlier period. Policyholders’ surplus has generally continued to increase in recent years as the industry generated profits, and as assets held in the industry’s investment portfolio increased in value.

If net premiums written serve as a measure of risk to be provided, one way to gauge how robust the surplus buffer is to relate surplus to net premiums written. This is usually expressed as a ratio of premiums to surplus. A ratio of 1.00 to 1.00 is considered good, and a lower ratio is stronger because it means there are more “surplus” assets to pay unexpected claims.

As of the end of 2019:Q2, that ratio was 0.77 to 1.00 (i.e., $615.2 billion in 12-month trailing net premiums written divided by $802.2 billion in surplus).


Last quarter we wrote that the first quarter of 2019 “generally went well” for the P/C industry, “although there were some bumps in the road.” Now we can say the same thing for the first half of 2019.This observation should not be surprising: in its commentary on the first half of 2019, ISO/APCIA notes that “first half underwriting gains are often concentrated in the first quarter—that was the case for 24 of the last 30 years.”

The first half of 2019 was by most measures financially successful for insurers writing P/C insurance. Two measures of the industry’s health—revenue and capital—rose in 2019:1H. Net premiums earned grew by 3.8 percent for the half (although incurred claims grew by 5.7 percent). Policyholders’ surplus—what in other industries would be called net worth—rose by 5.4 percent over its level at the end of the first half of 2018, ending at $802.2 billion.

The industry is extremely well capitalized and financially prepared to pay out very large-scale losses for the rest of 2019 and beyond. One commonly used measure of capital adequacy, the ratio of net premiums written to surplus, currently stands at 0.77 to 1.00, close to its strongest level in modern history (a lower number represents greater strength).

The bottom line? Net income after taxes was $32.8 billion in the first half of 2019. This is only slightly below the two recent strongest first halves. The industry’s annualized rate of return on average surplus was 8.5 percent for the first half of 2019, compared to 9.0 percent for the comparable period in the prior year.

The P/C insurance industry turned in a profitable overall performance in the first half of 2019. Policyholders’ surplus reached a 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 the first half of 2019 follows.

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

To view the press release from ISO Click here.

First Half 2019 Financial Results*

($ billions)

Net Earned Premiums $304.0
Incurred Losses (Including loss adjustment expenses) 212.6
Expenses 85.0
Policyholder Dividends 1.1
Net Underwriting Gain (Loss) 5.4
Investment Income 26.9
Other Items -0.9
Pre-Tax Operating Gain 33.1
Realized Capital Gains (Losses) 4.3
Pre-Tax Income 37.5
Taxes 4.7
Net After-Tax Income $32.8
Surplus (End of Period) $802.19
Combined Ratio 97.3**

*Figures may not add to totals due to rounding. Calculations in text based on unrounded figures.
**Includes mortgage and financial guaranty insurers.

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