Property and casualty insurers' results improved sharply in 2013's first half compared to the same time a year ago, and the industry remains financially strong, but economic pressures mean carriers must achieve stronger underwriting results than in the past to remain profitable, a new analysis shows.

The industry's 2013 first-half net income after taxes increased by 42.4 percent, to $24.5 billion, compared to the year before, according to an ISO, Property Casualty Insurers Association of America, and Insurance Information Institute analysis. The combined ratio for the first half of the year was 97.9, down from 101.9 in 2012's first half.

Insurers benefitted from a combination of premium growth and lower losses, resulting in net underwriting gains of $2.3 billion—compared to an underwriting loss of $6.4 billion in 2012's first half—and pretax operating income of $25.8 billion, up from $19.2 billion last year.

PCI's Senior Vice President for Policy Development and Research Robert Gordon says, “The drop in net losses and loss-adjustment expenses (LLAE) from catastrophes accounts for about one-third of the improvement in underwriting results in first-half 2013, with the remainder primarily attributable to premium growth.”

Gordon also points out that underwriting profitability improved for all major sectors of the industry.

ISO Assistant Vice President for Financial Analysis Michael R. Murray says, “Insurers' overall results for first-half 2013 were certainly better than their results for first-half 2012, with insurers posting net gains on underwriting through six months for the first time since 2007.”

But Murray adds that economic factors are forcing insurers to achieve better underwriting results to maintain profitability. He says “insurers' overall rate of return remained subpar compared with long-term historical norms, and insurers now need much better underwriting results just to be as profitable as they were in the past.”

He notes that the 8.2 annualized rate of return on average surplus for 2013's first half was under insurers' 8.9 percent average rate of return for the 54 years from 1959 to 2012 despite the combined ratio coming in 6.1 points lower than the 104 average for those 54 years.

“With investment yields, financial leverage and tax rates like those in the first-half 2013, ISO estimates that the combined ratio would have to improve another 1.2 percentage points to 96.7 for insurers to earn their long-term average rate of return,” says Murray.

Policyholders' surplus increased by $26.9 billion in the half year to $614 billion. PCI's Gordon says, “Insurers are strong, well capitalized and well prepared to pay future claims.”

While results across the industry were positive, mortgage and financial-guaranty insurers continued to struggle. Murray notes that the combined ratio for these insurers did drop by 48.4 points compared to the same period last year, but it still came in at 130.6, or 33.1 points higher than the 97.5 combined ratio for the industry excluding mortgage and financial-guaranty insurers.

Net written premiums for the entire industry, at $237.2 billion in 2013's first half, grew by 4.5 percent year-over-year, but ISO's Murray notes that growth did not accelerate for all P&C sectors. Insurers writing mostly commercial lines, he says, slowed to 3.8 percent growth in the period, while insurers writing mostly personal lines saw 5.3 percent growth.

Commenting on the industry's results, I.I.I. President Robert Hartwig says, “Premium growth, while still modest, is now experiencing its longest sustained period of gains in a decade. Fundamentally, the P&C industry remains quite strong financially, with capital-adequacy ratios remaining high relative to long-term historical averages.”

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