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 of2014, 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 bypolicyholder surplus) increased by $58.1 billion, or 9.4%, to a newrecord high at $671.6 billion. However, because capacity increasedat a rate faster than that of profits, the overall industry rate ofreturn fell by 0.3 percentage points in the first half of 2014 to7.8%, says Robert P. Hartwig, president of the InsuranceInformation Institute (III), a number that falls far short ofaverage 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&FGinsurers, the industry’s rate of return fell to 7.7% from 8.5% forthe first half of 2013, ISO reports.

The increase in insurers’ net income after taxes is the resultof a decline in pretax operating income, an increase in realizedcapital gains on investments and a small reduction in federal andforeign income taxes, ISO and PCI say.

Investment capital gains nearly doubled in the first half of2014, as they rose $3.3 billion to $7.2 billion, and federal andforeign 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 thefirst half of 2014. Operating income includes the sum of net gainsor losses on underwriting, net investment income and miscellaneousother income.

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

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

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