P&C net income after taxes increased by $1.6 billion (6.4%) to $26 billion among private U.S. insurers in the first half of 2014, according to the Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI).

In the same period, overall industry capacity (as measured by policyholder surplus) increased by $58.1 billion, or 9.4%, to a new record high at $671.6 billion. However, because capacity increased at a rate faster than that of profits, the overall industry rate of return fell by 0.3 percentage points in the first half of 2014 to 7.8%, says Robert P. Hartwig, president of the Insurance Information Institute (III), a number that falls far short of average industry norms of 9.0% from 1955 to 2013.

The turnaround of the mortgage and financial guaranty insurers (M&FG) saved the industry from further loss. M&FG insurers’ annualized rate of return rose to 13.4% for the first half of 2014, up from a 7.5% loss for the first half of 2013. Excluding M&FG insurers, the industry’s rate of return fell to 7.7% from 8.5% for the first half of 2013, ISO reports.

The increase in insurers’ net income after taxes is the result of a decline in pretax operating income, an increase in realized capital gains on investments and a small reduction in federal and foreign income taxes, ISO and PCI say.

Investment capital gains nearly doubled in the first half of 2014, as they rose $3.3 billion to $7.2 billion, and federal and foreign taxes dropped by $100 million to $5.1 billion.

This increase offset an ongoing weakness in P&C insurers’ operating income, which fell $1.9 billion to $23.9 billion in the first half of 2014. Operating income includes the sum of net gains or losses on underwriting, net investment income and miscellaneous other income.

Higher catastrophe losses (up 25%) contributed to a deterioration in underwriting performance, which fell to $300 million in the first half of 2014, down from $2.2 billion the year previous. Much of the cat losses can be attributed to the extreme winter storms in early 2014 and also this spring’s wildfire and tornado events.

“The deterioration in underwriting results and the drop in investment income both raise questions about the quality or sustainability of insurers’ earnings,” says Michael R. Murray, ISO’s assistant vice president for financial analysis.

Underwriting’s combined ratio—a measure of losses and other underwriting expenses per dollar of premium—deteriorated to 98.9% from 98.0% for the first half of 2013, according to ISO.

First half 2014 financial results ($ billions)20142013
Net written premiums$246.4$236.9
Net earned premiums $237.8$228.2
Incurred losses and loss adjustment expenses $168.1$158.0
Net underwriting gains$0.3$2.2
Net investment income$23.0$23.2
Pre-tax operating income$23.9$25.8
Net realized capital gains$7.2$3.9
Pre-tax income $31.1$29.5
Taxes $5.1$5.2
Net after-tax income $26.0$24.4
Surplus $676.6$613.5
Combined ratio 98.9%98.0%

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