6 January 2014

US industry profitable for the first time since 2007

The US insurance industry posted underwriting profits of $7.5 billion for the first nine months of 2013, according to a report by AM Best, a significant improvement on the $4.7 billion lost during the same period in 2012.

This is the first time that the industry has had a profitable first three quarters since 2007, helped by a benign catastrophe season, an increase in net premium written and the positive development of loss reserves, the report found.

The US industry’s combined ratio was 96.5 percent for the period, while pre-tax operating income reached $43.5 billion, up 35.3 percent from the same period in 2012. Substantially higher realised capital gains further boosted net income, up 54.9 percent from a year earlier.

The report found that underwriting improved across all segments of the US industry, while premium growth was achieved in personal and commercial lines, although not in the more volatile US reinsurance market.

Loss reserves contributed $13.1 billion in favourable development during the period, although asbestos and environmental claims continue to impair industry reserve positions. Favourable developments contributed 3.3 percentage points worth of improvement to the underlying combined ratios of US players.

US reinsurers

While US reinsurers enjoyed a benign catastrophe season, they nevertheless face considerable pressure from rising levels of convergence capital. Despite the influx of convergence capacity they did however generate $2.7 billion in underwriting gains during the period, a marked improvement on 2012.

The sector was also able to improve its combined ratio to 84.4 percent, down from 89.8 for the same period in 2012.  While investment income remains under pressure from macroeconomic uncertainties, net investment income increased 7.6 percent during the period, as compared with a decline of 11.4 percent in 2012. Return on equity rose two percentage points to 13 percent for the period.

US reinsurers continue to face considerable downward pressure on price thanks to rising primary retentions and increasing levels of convergence capital, with the June and July renewals seeing prices decline by as much as 20 percent.

In the face of difficult conditions reinsurers are utilising capital management strategies to manage future returns and shareholder expectations. Many are making share repurchases, taking advantage of the low interest rate environment to refinance existing debt and preferred securities with lower cost alternatives.

AM Best said that while it remains a challenging environment for reinsurers, they continue to post positive results, remain well-capitalised and have displayed good pricing integrity and underwriting discipline. The report warned that increased retentions were likely going forward, while the spill-over of pressure on reinsurance rates is beginning to be felt on primary lines.