Property-casualty insurance industry net income for the first half of this year hit a record $32.6 billion, but price decreases are beginning to show signs of affecting its future strength, two industry groups reported today.
The findings were made by the Jersey City, N.J.-based Insurance Services Office and the Property Casualty Insurers Association of America in Des Plaines, Ill., based on results from at least 96 percent of U.S. p-c insurers for all business.
Their report said the $32.6 billion net income was an increase of 11 percent, compared with $29.4 billion for the first half of 2006. Surplus rose 5.5 percent, or $27 billion, to $513 billion compared to where it was at the end of 2006, ISO said.
However, the report pointed to some deterioration in the industry's profitability.
The industry's overall profitability measured by its annualized rate of return on average policyholders' surplus fell slightly to 13.1 percent in the first half of this year, compared to 13.5 percent for the same period in 2006. Net gains on underwriting fell 4.1 percent to $14.4 billion for the first-half of 2007, compared to $15 billion in the first-half of 2006.
Combined ratio results worsened during the period going from 92 in the first half of 2006 to 92.7 for the first half of this year.
The deterioration in underwriting is blamed on increase competition.
"Market surveys and U.S. government data indicate that escalating competition and declines in the price of insurance are cutting into premium growth," said Michael R. Murray, ISO's assistant vice president for financial analysis in a statement.
Genio Staranczak, PCI chief economist noted that while the nation's gross domestic product grew 4.6 percent net written premiums grew by a meager 0.1 percent.
"That premiums barely rose as GDP grew at a relatively healthy pace is an indication that intensifying competition is leading to lower prices for most coverage in most locations, though property insurance increases are evident in some coastal areas," he said.
In his own analysis, Insurance Information Institute's President Robert P. Hartwig said the results showed the industry's resiliency in the face of increased competition, but warned that on its current cyclical path of softening prices the return on equity will bottom out at about 1 percent by 2011 and not reach a peak again until sometime around 2015 or 2016.
"The most important question facing the industry today is whether this painful and destructive cycle can be broken and with the commensurate surge in insurer impairments that invariably occur," Mr. Hartwig said.
He went on to say that there are indications that chief executives are managing their business in a way that could lead to a shallow market cycle.
"Insurance CEO's continue to vow that it will be different this time around and 2008 is quickly shaping up to be the year when the industry's fortunes will be cast," he predicted.
He went on to note that while the strong income and underwriting performance bodes well for the rest of the year, he cautioned that the results were the product of "one of the best combined ratios in decades."
As underwriting performance deteriorates there will be more dependence on investment gains for earnings, a shift, he suggested, that may have already begun.
The 0.1 percent premium growth "means that the industry growth has come to a screeching halt and is, in fact, severely negative on an inflation-adjusted basis," he said.
"The current slow-growth environment means that insurers face very difficult capital allocation decisions over the next several years," Mr. Hartwig said.
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