Investments could provide results boon for smaller insurers
Smaller market players reported worse results than their larger counterparts for Q1 2023 earnings, but saw strong investment income.
Andrew Putwainposted on Friday, May 12, 2023
Several well-known mid-sized US insurers reported losses in Q1 2023.
Large players such as AIG and Allstate reported healthy profits for Q1 in their underwriting, investment, and asset management portfolios, but their smaller counterparts and the mid-sized insurance companies saw tougher conditions.
The better results could be largely down to the strengthening of the US economy as the fears of recessionary conditions began to abate and more bullish sentiment overtook. In March, US inflation was at 5%, its lowest since 2021, according to consumer price index (CPI) from the Bureau of Labor.
The reduced volatility had eased some losses, but many companies were still experiencing falling returns.
Insurers such as mid-market Brighthouse Financial reported a net loss available to shareholders of $525 million in the first quarter of 2023 compared with net income available to shareholders of $1,558 million in the first quarter of 2022.
"The quarter-over-quarter results were primarily driven by lower alternative investment income, partially offset by asset growth."
“Net investment income was $1,059 million and adjusted net investment income was $1,097 million in the current quarter,” it said. “On a quarter-over-quarter basis, adjusted net investment income decreased $60 million and on a sequential basis increased $15 million. The quarter-over-quarter results were primarily driven by lower alternative investment income, partially offset by asset growth. Sequential results were primarily driven by asset growth and higher alternative investment income.”
They added their net investment income yield was 3.81% during the quarter.
Many other mid-sized insurers faced losses due to specifics around their niche areas – such as US law reform or weather events.
Last year, the National Association of Insurance Commissioners (NAIC) said profitability fell across the board, and while many larger re/insurers have regained their surplus, smaller companies appear to be getting battered for longer. “Net income in the US Property & Casualty Insurance Industry fell 14.5% to $34 billion in the first half of 2022, driven by underwriting losses compared to underwriting gains last year,” it said. “This was largely due to a significant deterioration in auto results, as auto physical damage was impacted by inflation and supply chain issues, and social inflation continued to impact commercial liability.”
However, the NAIC highlighted at the time that “strong investment returns offset the downturn in underwriting results”.
“Despite the unfavourable underwriting results, the industry still recorded a profit in the first half of 2022 due to the previously mentioned increase in investment gains,” it said. “Return on revenue (RoR) of 8.4% reflected the solid profitability but was 2.3-points lower compared to last year’s RoR of 10.7% as net income was lower in relation to net premiums earned and investment gains.”
With so many companies reporting losses, the trend could repeat into this year.
Chicago-based Kemper saw a net loss of $80.1 million for the first quarter of 2023, compared to a net loss of $86.3 million for the first quarter of 2022. The company said “Profitability [was] impacted by catastrophe losses, prior year adverse development, and higher-than-anticipated frequency.”
As NAIC highlighted last year, there were bright spots for its investment income. Kemper saw net realised investment gains of $5.1 million compared to $1.2 million in 2022.
Boston-based Safety Insurance reported a net loss for the quarter that ended 31 March 2023 of $12.3 million, compared to net income of $7.8 million, for the comparable 2022 period. “The first quarter results were significantly impacted by a thirty-six-hour period in February when temperatures plunged below zero across the Northeast region and Boston reached a low of minus ten degrees Fahrenheit, the first double digit negative temperature in the region since 1957,” said George M. Murphy, President and CEO. “This weather resulted in 783 burst pipe claims causing incurred water damage of $32.1 million, which contributed 17.0 percentage points to our combined ratio of 118.5%.”
“The medical professional liability market faces cost pressures driven by social inflation, reinsurance costs, and the weakening of tort reform."
Alabama-based medical liability insurer ProAssurance suffered deepening losses in Q1. It reported a net loss of $6.2 million and an operating loss of $8.1 million for the three months ending 31 March 2023. “Our first quarter results for 2023 highlight the challenging market dynamics in our core operating segments,” said the company’s statement on the results. “The medical professional liability market faces cost pressures driven by social inflation, reinsurance costs, and the weakening of tort reform. These pressures led to a higher net loss ratio in our Specialty P&C segment this quarter and resulted in unfavourable development of prior accident years in the segment.”
Other jurisdictions were also seeing some tougher conditions.
Bermuda-domiciled Argo Group also saw a loss. Its total catastrophe losses of $3.6 million were 59% lower than the first quarter 2022, which they said reflected “volatility reduction efforts through exiting businesses with property catastrophe exposure”.
Positive quarter for some
Some companies did see their profits increase, however. New Jersey-based Selective Insurance saw a 12% increase in net premiums written compared to Q1 2022. It also saw an after-tax net investment income of $73 million, which was up 25% compared to the first quarter of 2022.
For Q4 2022, it saw an after-tax net investment income of $65 million, which was up 1%, compared to last year. In Q3 last year the company saw lower-than-expected results like many others – it posted a $63. million return for the quarter, compared to $93 million in the same quarter for 2021.
"Notwithstanding persistent inflation and heightened frequency of severe weather events, the primary dials with which we monitor our business all moved in the right direction."
Lemonade Insurance also saw some growth with $653 million in In Force Premium compared to $419 million in 2022. “The first quarter of 2023 was strong, clocking solid performance across our key metrics. Notwithstanding persistent inflation and heightened frequency of severe weather events, the primary dials with which we monitor our business all moved in the right direction,” it said in its letter to shareholders on Q1 results. It saw $5 million in investment income compared to $0.9 million in 2022.
Chicago-based RLI Insurance reported net earnings for the first quarter of $98.8 million, which was nearly double the $47.9 million from the same period in 2022.
The company reported a 51% increase in net investment income to $27.1 million, compared to the same period in 2022. The investment portfolio’s total return was 2.8% for the quarter. “Investment income continued to support growth in operating earnings, and positive portfolio returns contributed to 12% growth in book value,” said RLI Corp. President and CEO Craig Kliethermes.