How Storms affect Insurance Companies

Three significant storms combined to put a big dent in the first-quarter profit of the nation’s property and casualty insurers.

P&C insurers saw net income after taxes drop to $7.7 billion in 1Q 2017 compared to $13.4 billion for the same period in 2016 — a 42.2% decline — according to a new report from ISO, a Verisk Analytics business, and the Property Casualty Insurers Association of America (PCI).

Overall profitability as measured by its annualized rate of return on average policyholders’ surplus fell to 4.4% from 7.9%.

The industry experienced $7.3 billion in direct catastrophe losses — the highest first-quarter catastrophe losses since the 1994 Northridge earthquake in California and $2.3 billion above the direct catastrophe losses for first-quarter 2016.

“Three major wind and thunderstorm events each resulted in more than $1 billion in damages in first-quarter 2017. That’s the first time we’ve seen three events of that magnitude in the first quarter in more than 60 years,” said Beth Fitzgerald, senior vice president, industry engagement at ISO. “Fortunately, insurers are well capitalized, and short-term volatility in catastrophe losses is not affecting their ability to provide coverage and pay claims.”

The NOAA’s Storm Prediction Center confirms the U.S. endured a particularly destructive start to 2017 based on the number of severe weather outbreaks from January through early April.

There were 5,372 reports of severe weather across the United States in 2017 through April 8, according to the Storm Prediction Center. That figure includes reports of tornadoes, large hail and wind damage.

This is more than double the average of 2,274 for the same period of time during the past 10 years (2007-2016). In that decade, only 2008 had about the same number of severe weather reports by that point in the year with 5,242.

The NOAA notes heavy, persistent rainfall across northern and central California in February created substantial property and infrastructure damage from flooding, landslides and erosion. Notable impacts include severe damage to the Oroville Dam spillway, which caused a multi-day evacuation of 188,000 residents downstream. Excessive rainfall also caused flood damage in the city of San Jose, as Coyote Creek overflowed its banks and inundated neighborhoods forcing 14,000 residents to evacuate.

A pair of separate tornado outbreaks in central and southeast states and in the Midwest in March also caused significant damage.

There was some good news for insurers. Fitzgerald noted that insurers are seeing some acceleration in premiums and investment income. Net written premium growth accelerated to 4% percent for 1Q 2017 from 3.2% in 2016. Net investment gains[1] increased by $1.2 billion to $14.4 billion in 1Q 2017 from $13.2 billion for 2016. The industry’s surplus[2]reached a new all-time high value of $709.0 billion as of March 31, 2017, increasing $8.1 billion from $700.9 billion as of December 31, 2016.

Back in May, ISO and PCI announced that private U.S. property/casualty insurers suffered a $4.7 billion net underwriting loss for 2016 — following an $8.9 billion net underwriting gain in 2015 — and experienced a 25% drop in net income after taxes to $42.6 billion from $56.8 billion a year earlier.

[1]Net investment gains equal the sum of net investment income and realized capital gains (or losses) on investments.

[2]Policyholders’ surplus is insurers’ net worth measured according to Statutory Accounting Principles

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