Profitability in the property/casualty insurance industry rebounded sharply in the first half of 2013 due to premium growth, a reduction in catastrophe losses and favorable prior year reserve development, according to new results released by the Insurance Information Institute.
The industry’s combined ratio fell to 97.9 in the first half of 2013 from 101.9 in the first half of 2012—leading to an underwriting profit of $2.3 billion. I.I.I. commented that this improvement is “much needed in an era of persistent, ultra-low interest rates.”
Indeed, the bottom line benefited commensurately as overall net income after taxes surged by 42.4 percent during the half to $24.5 billion, which is up from $17.2 billion in the same period last year. Net written premiums were also up 4.5 percent for the half (compared to the 3.7-percent gain recorded in first half of 2012) and 4.7 for the second quarter, which makes 13 consecutive quarters of growth, the longest continuous period of growth in nearly a decade.
Among carriers writing predominantly commercial lines, premiums written rose by 3.8 percent in the first half of 2013 (actually down from 5.3 percent in a year earlier) compared to 5.0 percent for insurers writing predominantly personal lines (up from 3.0 percent a year earlier) and 4.3 percent for those with a more balanced mix of business (up from 3.4 percent a year earlier).
Policyholders’ surplus as of June 30, 2013, stood at $614.0 billion, up 6.0 percent or $34.7 billion from year-end 2012, which I.I.I. notes as impressive given the losses suffered from Sandy and other catastrophes, going on to say that, “One commonly used measure of capital adequacy, the ratio of net premiums written to surplus, currently stands at 0.77, close to its strongest level in modern history.”
Nevertheless, the numbers also indicate that persistently low interest rates remain a challenge for the industry, with net investment income during the half slipping by $0.7 billion, or 2.8 percent, compared to the first half of 2012. Overall industry capacity rose to a record $614.0 billion as of June 30, 2013 — up $34.7 billion, or 6.0 percent, from $579.3 billion as of year-end 2012.
The industry results were released by ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).
I.I.I. added that it does not expect to see any impact on property/casualty insurer claims or sales operations as results of the government shutdown, adding that property/casualty insurers are well positioned to ride out the expected increase in financial market volatility due to the shutdown as well as the looming debt ceiling debate in mid-October.
Also a relief for insurers: While the past two years (2011 and 2012) ranked among the costliest on record for catastrophe losses, direct insured losses from catastrophes during the first half of 2013 fell by $4.7 billion, from $14.4 billion through the first half of 2012 to $9.7 billion this year. This year’s first-half catastrophe losses were close to the 10-year average for the first half ($9.2 billion), according to ISO’s PCS unit. The first half brought the May 19 tornado in Moore, Okla., and the June wildfires in Colorado, but looking ahead, the third quarter of 2013 has not brought any major catastrophes yet. Historically, the third quarter is the most costly in terms of catastrophe losses, however, hurricane activity remains far below expectations. Year-to-date tornado activity is also running far below long-run averages.
In addition to accelerating premium growth and lower catastrophe losses, favorable development of prior-year claims reserves totaled $8.5 billion in the first half of 2013, a material increase from $7.2 billion in the first half of 2012, according to ISO/PCI. Some of the reserve release is associated with lower than expected costs for Sandy claims, whereas much of the remaining sums released are associated with older events. Removing the effects of favorable reserve development results in a combined ratio of 98.5 for the half (versus 97.9 when the effects are included).
The improved combined ratio points to notable improvement in underwriting in the first half of 2013, according to I.I.I. Also contributing was continued and steady premium growth, which rose 4.5 percent in the first half, nearly a percentage point above the 3.7 percent year earlier reading. Premium growth for full-year 2012 was up 4.3 percent.
Moving forward, I.I.I. said improving labor market conditions in 2013 is critical to top line growth for P&C insurers, yet moderate growth is expected to continue as a result of strong growth in the workers compensation line, recovery in the residential construction sector and stronger car sales.
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