Q1 2023 sees US insurer Allstate returning to profitability after a painful Q4 2022. This result is part of a wider trend of large North American re/insurers reporting healthier margins this year compared to last. The numbers were mostly positive across their investments, asset management portfolio, premiums, and underwriting returns.
Some analysts have ascribed this trend to the easing effects due to the pandemic.
Allstate’s total revenues stood at $13.8 billion in the first quarter of 2023, which increased by 11.8% compared to the prior year quarter. The change was primarily driven by a 10.8% increase in Property-Liability earned premium and net gains on investments and derivatives in the first quarter of 2023 compared to a net loss in 2022.
The company released its earnings last week showing a bounce back to profitability largely seen across the US sector. In Q4, it announced preliminary results with an estimated net loss between $285 million and $335 million, and an estimated adjusted net loss between $335 million and $385 million. These numbers arrived despite other insurers, such as Travelers, staying in the black.
Allstate added that its Net loss applicable to common shareholders was $346 million in the first quarter of 2023 compared to income of $634 million in the prior year quarter. “The decrease was driven by an underwriting loss primarily due to higher catastrophe losses,” it said.
“The US [insurance] industry reports healthier profit margins, with
one-quarter enjoying high profitability.”
This decrease in losses also showed that the effects of inflation, interest rates hikes, and market volatility could be slowing down, the company said.
It also reflects a strengthening view in the US industry of profitability compared to the previous few years. An April study from tech firm AutoRek said “the US [insurance] industry reports healthier profit margins, with one-quarter enjoying high profitability.” The study was largely around tech, but others have also noted the strength in the industry with issues such as recent bank failures and the debt ceiling debates unlikely to cause harm.
The US economy is largely seen to be in good health, with Deloitte pointing to a "soft landing" for Q1 results, even though some of 2022's volatility will likely effect it for some time. "The Fed raised interest rates quickly in 2022, and some impact of those interest rate hikes could show up in 2023," said Deloitte's Daniel Bachman in the report. "We still don’t know if the Fed was too aggressive in 2022."
Allstate, which was one of the biggest US insurers to announce losses in the last quarter, joined most US insurers that released satisfactory Q1 2023 returns.
One of the biggest companies to do so was AIG, which saw general insurance adjusted pre-tax income (APTI) increase by $37 million to $1.2 billion from the prior year quarter. This was seen as due to better underwriting results and higher investment income on fixed maturity securities and loans, partially offset by lower alternative investment income.
"We saw uplift from new money investments as well as higher
resets on floating rate securities.”
“Net investment income was $3.5 billion in the first quarter and $3.1 billion on an APTI basis,” said AIG Chairman & Chief Executive Officer Peter Zaffino. “This reflects management of the portfolio over the last several quarters to improve the quality of investments and reduce volatility. We saw uplift from new money investments as well as higher resets on floating rate securities.”
The Reinsurance Group of America (RGA) saw income of $252 million in 2023 compared to $197 million in 2022. Net investment incomes were $856 million compared to $810 million in 2022.
Chubb's net income was $1.89 billion versus $1.95 billion in the prior year and core operating income was $1.84 billion, up 11.8%. Pre-tax net investment income was $1.11 billion, up 34.7%, and adjusted net investment income was $1.20 billion, up 33.2%. "Book value was favourably impacted by after-tax net realised and unrealised gains of $1.70 billion in the company’s investment portfolio," it added in the press release.
The Hartford, which like many saw a mixed 2022, reported losses of $185 million for its P&C underwriting business. It had a consolidated net investment income of $515 million, before tax, including $26 million, or a 2.5% annualised return, on limited partnerships and other alternative investments.
Many stakeholders noted the lack of profitability last year. Carlos Wong-Dupuy, Senior Director at AM Best, stressed the need for major players to return to profitability to main stability in the market. AM Best blamed many of the losses last year on rising interest rates, which pushed the value of bond holdings lower, leading to large unrealised losses on fixed maturities through the second quarter of 2022 (the most recent analysis available) on a GAAP basis. This shift impacted capital levels, which in turn affected profitability.
Allstate’s $63.5 billion investment portfolio saw 75% allocated to investment grade fixed income and short-term investments, and holdings of high yield debt and public equities, which were substantially reduced over the last year.
“Net investment income was $575 million in the first quarter of 2023, a decrease of $19 million from the prior year quarter, as higher market-based income was offset by lower performance-based results and higher expenses,” it said.
Market-based investment income was $507 million in the first quarter of 2023, an increase of $184 million, or 57%, compared to the prior year quarter, reflecting higher interest rates and investment balances, it said. “Performance-based investment income totalled $126 million in the first quarter of 2023, a decrease of $180 million compared to strong valuation increases in the prior year quarter”.
Allstate said its $9 billion portfolio is comprised of more than 400 investments primarily in private equity, real estate, and infrastructure. Commercial real estate is also diversified with approximately $230 million in office properties, including commercial mortgage loan investments.
“Net gains on investments and derivatives were $14 million in the first quarter of 2023, compared to $267 million of net losses in the prior year quarter,” the statement said. “Net gains in the first quarter of 2023 were driven by valuation increases on equity investments, partially offset by losses on fixed income sales and net losses on derivative positions," it added.
“The investment portfolio risk profile is lower than long-term targets and could provide approximately $16 billion of liquidity within one week.”
The total return on the investment portfolio was 2.4% for the first quarter of 2023. Proactive portfolio management actions continue to defensively position the investment portfolio to the risk of economic recession, including extending fixed income duration and reducing public equity exposure.
“The investment portfolio risk profile is lower than long-term targets and could provide approximately $16 billion of liquidity within one week,” said Jess Merten, Chief Financial Officer. “Liability funding is highly predictable with approximately 75% related to future claim settlements and unearned insurance premiums.”
