III - economics

2020 - Commentary on first quarter financial results

Charlene Lewis — Mon, 20 Jul 2020 14:46:24 +0000

July 28, 2020

Premiums

P/C insurers measure premium income in three ways, each of which gives a different insight into industry activity. Direct premiums written (DPW) reflect the amount that policyholders pay for insurance. This is a basic gauge of 鈥渞etail鈥� activity. Net premiums written (NPW) are calculated by subtracting the amount insurers pay for reinsurance from direct premiums and are therefore a simple gauge of the net amount of risk that insurers plan to assume. Net premiums earned (NPE) are derived by adjusting NPW to reflect the insurance that was provided. Direct premiums and NPW are forward-looking measures, while net earned premiums are a backward-looking concept.

Direct premiums. Most personal direct premiums and some commercial direct premiums are required by law or by terms of commerce (such as homeowners insurance to protect a lender鈥檚 mortgage). Therefore, as a rule, direct premiums follow the changes in the number of drivers, homes and businesses鈥攅ssentially a measure of growth of the U.S. economy. This is a loose relationship; it is more a year-by-year than a quarter-by-quarter correlation.

The U.S. economy in the first quarter of 2020鈥攗p to the middle of March鈥攚as surprisingly strong, considering that it extended the longest expansion (since the end of the Great Recession in June 2009) in modern U.S. economic history. But the recognition of the spread of the COVID-19 pandemic brought the expansion to a screeching halt, plunging the U.S. economy into one of the steepest recessions it has ever seen. The result was a drop in real GDP at a 5.0 percent annual rate.

Nominal (i.e., not inflation-adjusted) GDP shrank in 2020:Q1 by -3.6 percent. ISO estimates that direct premiums for all lines of P/C business grew at 4.6 percent in the first quarter of 2020, slightly faster growth compared to 4.4 percent in the first quarter of 2019. Premium rates and exposure levels were set long before the 2020 recession struck, so it is no surprise that the drop in nominal GDP didn鈥檛 match the rise in DPW.

Net premiums written. As we and others have written before, one significant effect of the Tax Cuts and Jobs Act of 2017 for the P/C insurance industry was to boost calculated NPW by incentivizing insurers to reduce their reinsurance with non-U.S. reinsurers. Thus the 2018 first quarter net premium written growth was unusually high (+15.7 percent). In contrast, because it was compared with an unusually high prior quarter, the first quarter 2019 net premium written change was -1.1 percent (Figure 1). But as an indicator of industry revenues, this negative net premium written growth rate is misleading; ISO suggests that if one takes the base for growth as the 2017:Q1 level, the average annual net premium written growth over the two years is 6.9 percent per year. Using that average as a baseline, the NPW growth for 2020:Q1 was 6.2 percent鈥攅ssentially on trend.

Fig. 1

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NPW growth for the major subsectors of the industry moved in the same direction, but to different degrees. For insurers writing predominantly personal lines, premiums rose by 3.0 percentage points (vs. a growth rate of 4.5 percent in the same quarter, prior year). For those writing mainly commercial lines (excluding mortgage and financial guaranty insurers), premiums spiked by 12.1 percentage points (vs. -9.3 percent growth in 2019:Q1). And those writing balanced books of business posted net premium written growth 3.2 percent higher than the year-earlier quarter.

Net premiums earned. NPE for insurance that was provided in 2020:Q1 were $157.7 billion, up 5.4 percent over 2019:Q1. This was a solid increase, surpassing the 4.6 percent growth in 2019: Q1. However, note that the average annual growth in NPE over the two years from 2017:Q1 to 2019:Q1 was 7.0 percent, according to ISO.

LLAE and Expenses

There are two main drivers of underwriting performance: losses and loss-adjustment expenses (LLAE), and other expenses for marketing, underwriting and general administration.

LLAE in 2020:Q1 totaled $105.4 billion, net of reinsurance recoveries, and were up by 3.5 percent over the $101.8 billion in the first quarter of 2019. Commonly LLAE includes the effect of changes in reserves for future payment of previous claims that are still not finalized鈥攖hat is, current-year effects of prior-year claims. In the first quarter of 2020 insurers released $3.7 billion from reserves previously set aside for prior claims but after reevaluation, were not needed for that purpose.

To put 2020:Q1 reserve releases in recent historical perspective, note that for the first quarter of 2019, the industry reported releases of prior-year claims reserves totaling $4.5 billion; in 2018:Q1, $7.4 billion; $5.5 billion in 2017:Q1; and $4.4 billion in 2016:Q1. Reserve releases contribute to underwriting profit; reserve strengthening would subtract from it.

It can be useful to subdivide LLAE into claims that result from catastrophes and those that do not. In the first quarter of 2020, catastrophe-related claims were $5.8 billion, up $1 billion from 2019:Q1. The first quarter is not normally a high-catastrophe-loss period but in its commentary on the 2017:Q1 catastrophe claims ($7.7 billion), ISO/APCIA noted that except for the Northridge Earthquake claims in 1994:Q1, for the prior 68 years (from 1950 through 2017), the only other time that catastrophe losses topped $4 billion in the first calendar quarter was 2016:Q1, at $5.0 billion. Now it seems like a new first-quarter CAT-loss trend is emerging, with five consecutive years of first-quarter catastrophe LLAE of $4.8 billion or more.

Net losses for non-catastrophe claims increased by $2.6 billion, to $99.7 billion from $97.1 billion in 2019:Q1鈥攔ising by 2.7 percent. In the absence of other forces at work, one would expect non-catastrophe LLAE to rise at the same rate as the extent of protection provided鈥攁s measured by net premiums earned. However as noted above, in 2020:Q1 NPE rose by a larger percentage: 5.4 percent, over the year-earlier quarter.

General expenses grew by 10 percent to $46.0 billion vs. the $41.8 billion spent in 2019:Q1. The size of this increase might be a timing matter; note that the change from 2018:Q1 to 2019:Q1 was a drop of 0.5 percent. To put expenses into context, we compare them to net premiums earned. This yields 29.1 percent in 2020:Q1, 27.9 percent in 2019:Q1 and 29.4 percent in 2018:Q1.

探花精选 Operations

Overall insurance operations performance (excluding investment performance) is the difference between NPE and the sum of incurred losses, expenses and dividends to policyholders. The first quarter of 2020 produced a net underwriting gain of $6.3 billion on NPE of $157.7 billion. This means that seven out of the last eight years registered first quarter underwriting gains. However, this string followed four years of equally large first quarter underwriting losses (Figure 2).

Fig. 2

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A widely used industry metric for gauging overall insurance operations is the combined ratio. This ratio is the sum of three percentages: losses and loss adjustment expenses as a percent of net earned premiums; policyholder dividends as a percent of NPE; and other expenses as a percent of NPW. In 2020:Q1 this ratio was 94.9, improving slightly from 95.6 in 2019:Q1. (A lower ratio means better performance.)

Combined ratios for the major subsectors of the industry moved in the same direction, but to different degrees. For insurers writing predominantly personal lines, the combined ratio improved by 2.7 percentage points, to 92.2 percent. For those writing mainly commercial lines (excluding mortgage and financial guaranty insurers), the combined ratio rose by 1.3 percentage points to 97.7. And those writing balanced books of business posted a combined ratio of 95.8, 1.3 percentage points better than in the year-earlier quarter.

Investment performance

For the first quarter of 2020, net investment gains (which include net investment income plus realized capital gains and losses) were $14.3 billion, down $0.5 billion from 2019:Q1. 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. Recent patterns in these two components are shown in Figure 3.

Fig. 3

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Net investment income itself has basically two elements: interest payments from bonds and dividends from stock. The industry鈥檚 net investment income for the first quarter of 2020 was $13.2 billion, basically flat鈥攗p by $0.02 billion鈥攙s. 2019:Q1. Most of this income comes from the industry鈥檚 bond investments, which are mainly high-quality corporate bonds and municipal bonds.

As captured by the Bank of America Corporate AA-rated seasoned bond index, corporate bond market yields fell in the first quarter of 2020, averaging just above 2 percent in the first three months of 2020, down more than a full percentage point from the first quarter of 2019. The yields in 2020 continued to shave income off the industry鈥檚 bond portfolio despite its growing size. This is because most bonds that are maturing now and being reinvested command lower yields than the bonds they replace. For example, 10-year AA bonds bought in the first quarter of 2010 averaged 3.6 percent.

The other significant source of net investment income (besides bond yields) is stock dividends. Seasonally adjusted, net dividends in the first quarter of 2020 (of nonfinancial domestic corporate business) plunged from $499.0 billion in 2019:Q1 to $288.0 billion in 2020:Q1. Stock holdings in general represent roughly only about one-fifth of the industry鈥檚 invested assets.

On the income statement, the other significant source of net investment gains is realized capital gains. The broad stock market, as measured by the S&P 500, fell by 20.0 percent in the first quarter of 2020, although virtually all of that occurred in the last two weeks of the quarter, providing little opportunity for cashing gains. Despite this, the industry realized $1.1 billion in realized capital gains in 2020:Q1, compared to $1.6 billion in the first quarter of 2019.

Profits

As Figure 4 shows, the P/C industry has posted positive net income after taxes in each first quarter for the past 11 years. First-quarter profits have varied from year to year, averaging $15.3 billion per year over that span. And as Figure 5 shows, the main source of that variation is underwriting gains or losses. Overall profit in 2020:Q1, was above average at $17.9 billion, thanks to the strongest first-quarter underwriting gains in the past decade.

Fig. 4

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Fig. 5

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Policyholders鈥� surplus (capital/capacity)

Policyholders鈥� surplus is the excess of assets over liabilities鈥攚hat in other industries is called 鈥渘et worth.鈥� Both in dollar terms and in relation to insurance activity, it is a valuable indicator of the strength and capacity of the industry to handle the risk it has accepted. Policyholders鈥� surplus as of March 31, 2020, fell $75.9 billion to $771.9 billion, from the end of 2019. Most of the fall in surplus in the first quarter compared to year-end 2019 could be attributed to unrealized capital gains.

One commonly used measure of capital adequacy for insurers, the ratio of NPW to surplus, currently stands at 0.83, a very strong position (a lower ratio means greater capacity). The industry is extremely well capitalized and if necessary, financially prepared to pay very large-scale losses in 2020 and beyond.

Summary

The P/C insurance industry turned in a profitable performance in the first quarter of 2020, buoyed by continued premium growth and favorable investment results. Policyholders鈥� surplus fell but remains at a high level. Fundamentally, the P/C insurance industry remains quite strong financially.

A detailed industry income statement for the first quarter of 2020 follows.

To view the full report from Verisk/ISO and APCIA,聽click here.

First quarter 2020 financial results*

($ billions)

Net Written Premiums聽聽	$164.4
Net Earned Premiums	157.7
Incurred Losses (Including loss adjustment expenses and reserve adjustments)	105.4
Expenses	46.0
Policyholder Dividends	0.8
Net Underwriting Gain	6.3
Net Investment Income	13.2
Other Items	0.0
Pre-Tax Operating Gain	19.4
Realized Capital Gains	1.6
Pre-Tax Income	20.6
Taxes	3.0
Net After-Tax Income	$17.9
Surplus (End of Period)	$771.9

*Figures may not add to totals due to rounding. Calculations in text based on unrounded figures.

Inflation watch - February 2017

Anonymous — Wed, 15 Mar 2017 18:21:22 +0000

Dr. Steven N. Weisbart, CLU

March 15, 2017

The 探花精选 Information Institute (I.I.I.) Inflation Watch spreadsheet contains the latest data from the U.S. Department of Labor鈥檚 Bureau of Labor Statistics (BLS). Both current and expected near-term general inflation continue to be low by historical standards, but there are pockets of rising inflation. The CPI-U鈥攖he popular measure of inflation, sometimes called headline inflation鈥攔ose by 2.7 percent in February 2017 vs. February 2016, before seasonal adjustment. Core inflation鈥攖he overall index minus the effects of price changes for food and energy鈥攔ose 2.2 percent for the 12 months ending February 2017. (Most economists prefer a year-over-year time frame and the core鈥攏ot the 鈥渉eadline鈥� inflation measure.) The BLS year-over-year core inflation rate has been essentially flat since January 2016. The core year-over-year Personal Consumption Expenditure (PCE) deflator鈥攖he Federal Reserve Bank鈥檚 preferred inflation measure鈥攈as ranged from 1.3 percent to 1.9 percent since the end of the Great Recession and, as of January 2017, was 1.7 percent (the latest value). By some measures there still appears to be a little slack in both the U.S. and especially the larger global economies, making sharp near-term overall future price increases unlikely. From a macroeconomic policy viewpoint, gradually rising inflation is possible and is being watched by the Federal Reserve Board鈥檚 Open Market Committee, among others. Many forecasters project headline CPI for 2017 to range between 2.3 and 2.8 percent.

Price trends for items that more directly affect property/casualty (P/C) insurance claims do not necessarily follow broad-based price indexes. Prices for items such as intensive healthcare affect claims under third-party coverages such as workers compensation and bodily injury liability, as well as first-party coverages like Personal Injury Protection (PIP) and med pay and, obviously, medical expense insurance. For many years these price increases have far outpaced both headline inflation and the overall price index for medical care, but that has been moderating lately. Seasonally adjusted on a year-over-year basis, in February 2017 prices for inpatient hospital care rose by 3.9 percent. Seasonally adjusted prices for outpatient hospital services rose by 4.3 percent in February 2017 over February 2016. This could constitute a 鈥渘ew normal鈥� for these services: in 16 of the last 20 months, the year-over-year rise in outpatient hospital prices was below 4 percent (and in the other four months it was under 4.8 percent). However, price changes for prescription drugs have been rising more strongly; February 2017 saw a 5.2 percent year-over-year rise.

Price increases relating to auto insurance property claims have been quite moderate recently. Prices for motor vehicle parts and equipment, which affect not only comprehensive and collision claims, but property damage liability as well, dropped by 0.9 percent in February 2017 vs. February 2016. These prices fell in most months since August 2012, although oddly the December 2016 change from November 2016 was +0.6 percent鈥攖he largest one-month rise in 5 years. Current prices for motor vehicle parts and equipment are about even with prices in May 2011. Prices for motor vehicle repair rose by 2.3 percent for the 12 months ended February 2017, thanks primarily to a one-month jump of 0.7 percent in November 2016 over October 2016. Prices for motor vehicle body work rose by 2.7 percent year-over-year (not seasonally adjusted). The BLS survey of consumer prices for motor vehicle insurance in February 2017 rose by 7.6 percent year-over-year; this is partly attributable to one-month increases of 0.8 percent or greater in four of the last 12 months. Of course, many factors other than prices for auto repair鈥攕uch as the continuing drop in insurers鈥� investment income, and continuing above-CPI growth in the prices for intensive medical care, and an unusual upturn in the collision rate, which is related to the increase in the number of people employed (and adding cars to rush hour)鈥攍ikely are affecting these increases.

Some price increases relating to property insurance claims have been quite moderate recently. From the producer price index for commodities (not seasonally adjusted), prices for furniture and household durables rose by 0.5 percent year-over-year; prices for lumber and wood products rose by 2.7 percent in February 2017 over February 2016. However, prices for metals metal products rose by 8.2 percent. The Census Bureau computes a price index for new single-family houses under construction; the latest data is for January 2017, showing a 9.0 percent increase over the index in January 2016.

Also, there are some signs that wages are growing barely faster than inflation. The Bureau of Labor Statistics reported that, on a year-over-year basis, average weekly earnings grew by 2.5 percent in February 2017 over the prior February, and average hourly earnings grew by 2.8 percent. Wage growth affects workers compensation and, indirectly, liability and PIP claims. Wage growth above inflation means consumers have increased buying power, which could lead to stronger economic growth near term. As the economy approaches full employment, wage gains over inflation are expected to widen, but that has not developed yet. There is still slack in the labor market, as evidenced by the 5.7 million people who are working part-time but want full-time employment, the 522,000 people who say they are 鈥渄iscouraged鈥� from even looking for a job, and others who are not in the labor force but could join if job conditions tighten, etc. The labor market slack is generally believed to restrain higher inflation, at least in the coming months.

聽

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