Quarterly loss & adjustment expenses for U.S. P&C carriers up ‘for the first time’ since Superstorm Sandy

Private property and casualty insurers in the United States experienced a 2.6-point year-over-year increase in their first-quarter combined ratio and a 51% drop in their net underwriting gain, as loss and adjustment expenses rose more quickly than premiums, according to the Property Casualty Insurers Association of America and Insurance Services Office (ISO) Inc.

Net loss and loss adjustment expenses (LLAE) for private U.S. P&C insurers totalled $80.789 billion during the first quarter of this year, up 8.6% from $74.376 billion during the same period in 2013, PCI and ISO stated July 3 in a joint press release. All figures are in U.S. dollars.

The net underwriting gain (which is the statutory underwriting gain minus policyholder dividends) was $2.235 billion in Q1 2014, down 51% from $4.521 billion in Q1 2013, ISO and PCI added. The combined ratio, post dividends, was 97.3% in Q1 2014, up from 94.9% in Q1 2013. The statutory underwriting gain was $2.908 billion in Q1 2014, down 43% from $5.076 billion in Q1 2013.

“Underwriting results would have deteriorated more in first-quarter 2014 if not for $5.5 billion in favorable development of LLAE reserves based on new information and updated estimates for the ultimate cost of old claims from prior accident years,” PCI and ISO noted. “The $5.5 billion of favorable reserve development in first-quarter 2014 follows $5.6 billion of favorable development in first-quarter 2013.”

The quarterly LLAE rose “for the first time since Superstorm Sandy struck in fourth-quarter 2012,” ISO and PCI stated. Hurricane Sandy had been downgraded to post-tropical storm status when it made landfall about 200 kilometres south of New York City Oct. 29, 2012. The following month, EQECAT Inc. estimated insured losses could reach $20 billion economical losses could be as high as $50 billion.

In the first quarter of 2014, net written premiums for U.S. private P&C insurers were $121.421 billion, up 3.6% from $117.201 billion in Q1 2013, ISO and PCI stated. Net earned premiums were $117.88 billion, up 4.3% from $112.97 billion in Q1 2013.

“Increases in both catastrophe and non-catastrophe losses contributed to the upward surge in overall LLAE,” ISO and PCI said. “ISO estimates that private U.S. insurers’ net LLAE from catastrophes increased to $3.2 billion for first-quarter 2014 from $2.5 billion a year ago. Other net LLAE rose $5.7 billion, or 8.0 percent, to $77.6 billion in first-quarter 2014 from $71.9 billion in first-quarter 2013.”

Jersey City-based ISO provides data services to the insurance industry while Chicago-based PCI is an industry association of American insurance firms — who, put together, write 46% of the nation’s auto market, 32% of the homeowners market, 37% of the commercial property and liability market and 41% of the private workers compensation market.

The net LLAA from catastrophe for private U.S. P&C insurers includes losses both in and outside the U.S., but excludes losses covered by the National Flood Insurance Program, residual market insurers, and foreign insurers and reinsurers.

“U.S. insurers’ $3.2 billion in net LLAE from catastrophes in first-quarter 2014 is primarily attributable to catastrophes that struck the United States,” ISO and PCI said. “Though estimating U.S. insurers’ LLAE from catastrophes elsewhere around the globe is difficult, the available information suggests that U.S. insurers’ net LLAE from catastrophes elsewhere around the globe was immaterial in both first-quarter 2014 and first-quarter 2013.”

ISO’s property claims services (PCS) reported that direct insured property losses from catastrophes striking the U.S. was $3 billion in Q1 2014, up 7% from $2.8 billion in Q1 2013.

“Direct catastrophe losses are before reinsurance recoveries and exclude loss adjustment expenses,” PCI and ISO stated. “These figures include losses covered by residual market insurers, foreign insurers, and reinsurers but exclude ocean marine losses and losses covered by the National Flood Insurance Program.”

Net investment income earned was $11.18 billion in Q1 2014, down 2% from $11.413 billion in Q1 2013. Most of that income was comprised of dividends earned from stocks and interest earned from bonds.

The annualized yield on insurers’ investments was 3.1% in Q1 2014, down from 3.3% in Q1 2013,  stated Robert Gordon, senior vice president for policy development and research at PCI, in the release.

“From 1960 to 2013, insurers’ investment yield averaged 5.1 percent but ranged from as low as 2.8 percent in 1961 to as high as 8.2 percent in 1984 and 1985,” Gordon noted.

Since ISO started keeping quarterly data on capital gains in 1986, the insurers’ capital gains have averaged $2.6 billion a quarter, ISO noted. But those gains “have rained from as high as $26.8 billion” in Q4 1998 to a capital loss of $31.9 billion in Q4 2008.