Mother Nature Allows P&C Insurers a Profit

First-half 2013 P&C Insurance results
point to strong performance.

By Mark E. Ruquet

Rates are increasing, profits are heading upward and losses are down considerably, all of which points to a very profitable year for the property and casualty insurance industry. Of course, the results are primarily driven by loss experience, meaning Mother Nature still has her say.

Last week’s report on the P&C insurance industry's performance said net income after taxes increased $24.5 billion for the period up from $17.2 billion for the first half of 2012. Investors should have smiled a little with annualized rate of return at an average 8.2 percent, up from 6.1 percent—still a far cry from other industries where rate of return is in the double digits.

According to ISO, a Verisk Analytics Co. and the Property Casualty Insurers of America, sponsors of the report, the industry managed an underwriting profit of 97.9, a four point improvement from last year.

Michael R. Murray, ISO’s assistant vice president for financial analysis said this was the first time since 2007 that insurers posted underwriting gains for the first six months, but the overall rate of return “remained sub-par compared with long-term historical norms.” The average rate of return for 54 years from when ISO began keeping the data is 8.9 percent. To reach the long term average this year the industry needs to improve its combined ratio another 1.2 percentage points.

Robert Hartwig, president of the Insurance Information Institute, said economic growth has helped fuel the increase as customers insure more assets and the workforce grows, aiding increases in workers compensation premiums. However, rate activity is “the most important determinant” to the development in auto, home and major commercial lines that are all trending positively. He adds that “overall industry growth could outpace overall economic growth in 2013, as was the case in 2012.”

“Premium growth, while still modest, is now experiencing its longest sustained period of gains in a decade,” notes Hartwig.

Robert Gordon, PCI’s senior vice president policy development and research, observed that the industry’s performance is still subject to the whims of the weather. The industry’s capacity is strong with record-high policyholder surplus of $614 billion making the P&C industry “strong, well capitalized and well prepared to pay future claims.” However, hurricane predictions for the second half of this year called for another very active season, one that has not yet materialized.

“We have been very lucky so far,” said Gordon, noting that last year’s Superstorm Sandy occurred during the last days of October and that there have been 15 catastrophic fourth-quarter hurricanes since 1950, with three of those occurring in the second half of November.

If there is one positive prospect for the industry in the coming days, it is that the government shutdown should not affect the industry, said Hartwig. 

“Property & casualty insurers are well positioned to ride out increased financial market volatility attributable to the shutdown as well as the looming debt ceiling debate in mid-October,” Hartwig said.