First-quarter net income after taxes for private P&C insurers in the United States increased to $14.4 billion from $10.2 billion in Q1 2012, according to quarterly data from ISO.

Insurers' annualized rate of return on average surplus climbed to 9.6 percent in first-quarter 2013 from 7.2 percent in first-quarter 2012, approaching the long-term average for the first quarter, ISO said. Insurers’ first-quarter annualized rate of return has averaged 10 percent since ISO’ began publishing the quarterly data in 1986. The average rate of return has ranged from negative 2.6 percent in 1994 to 17.9 percent in 2005.

“With government, academic, and commercial forecasters all warning that this year’s hurricane season will be unusually bad, the insurance industry’s record-high $607.7 billion in policyholders’ surplus as of March 31 means that elected officials, regulators and policyholders can all be confident that insurers have the financial resources necessary to fulfill their obligations — just as insurers did after Katrina, all through the financial crisis of 2008, and are now assisting our nation’s recovery from Sandy,” said Robert Gordon, PCI’s SVP for policy development and research. “The $20.9 billion increase in policyholders’ surplus in first-quarter 2013 underscores that insurers are strong, well capitalized, and well prepared to pay future claims.”

The $4.6 billion in net gains reflect premium growth, increases in reserve releases and a decline in weather-related catastrophe losses, and were driven by a $4.8 billion swing on underwriting from a net loss of $0.1 billion in underwriting in Q1 2012, according to ISO and the Property Casualty Insurers Association of America (PCI).

This was the first quarter of profits on underwriting since Q4 2009; insurers posted net gains on underwriting in 17 of the 109 quarters since the beginning of 1986. Net losses on underwriting were posted in the other 92. Insurers have lost a cumulative $407.7 billion on underwriting since the beginning of 1986.

Results for Q1 2013 benefited from special developments that bolstered investment results, ISO said. Net investment gains increased $0.4 billion to $12.8 billion from $12.3 billion in Q1 2012, as write-downs on impaired investments decreased; net investment gains decreased $0.2 billion excluding the decline in write-downs.

A decline in miscellaneous income and an increase in federal and foreign income taxes also affected results for the quarter.

“Insurers’ miscellaneous other income fell $0.5 billion to negative $0.1 billion in first-quarter 2013 from positive $0.4 billion in first-quarter 2012 as their federal and foreign income taxes rose $0.5 billion to $2.9 billion from $2.3 billion,” ISO said.

Pretax operating income for Q1 2013 increased to $15.9 billion from $11.9 billion in Q1 2012.

Policyholders’ surplus increased $20.9 billion to a record-high $607.7 billion on March 31, 2013, from $586.9 billion at December 31, 2012, reflecting net income after taxes and unrealized capital gains on investments, which are not included in net income.

Net income after taxes, excluding reserve releases changes, catastrophe losses, write-downs on impaired investments and the estimated tax consequences of those changes, increased by $1.3 billion, or 12.6 percent, to $11.5 billion for the quarter. Insurers’ annualized overall rate of return increased 0.5 percentage points to 7.7 percent.

“The net gain on underwriting for the first quarter of this year is especially welcome given the toll that long-term declines in interest rates and investment leverage have taken on insurers’ ability to use investment earnings to balance underwriting losses,” said Michael Murray, AVP for financial analysis at ISO. “Based on daily data since the start of 1962, the yield on ten-year Treasury notes fell from a record-high 15.84 percent on September 30, 1981, to a record-low 1.43 percent on July 25, 2012, and had only recovered to 2.41 percent as of June 20 this year. Reflecting the high interest rates of the 1980s and insurers’ investment leverage at the time, insurers’ overall rate of return during the decade averaged 10.3 percent, even though the combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — averaged 109.3 percent. Because of today’s interest rates and investment leverage, insurers’ 9.6 percent annualized overall rate of return for first-quarter 2013 was more than a half percentage point less than their average rate of return during the 1980s, even though the 94.8 percent combined ratio for first-quarter 2013 was more than 14 percentage points better than the average for that decade.”

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