Property-casualty insurer net income for the first half of this year soared by double-digits to $32.6 billion, but deepening price cuts in all but catastrophe-exposed properties are beginning to undermine the industry's future financial strength, industry leaders warn.
The industry's cumulative net income was up 10.7 percent, compared with $29.4 billion for the first half of 2006, according to a quarterly report by the Insurance Services Office Inc. and the Property Casualty Insurers Association of America–based on results from at least 96 percent of U.S. p-c insurers.
Industry surplus rose 5.5 percent–some $27 billion–to $513 billion compared to where it was at the end of 2006, the groups noted.
However, the report also pointed out signs of some deterioration in the industry's overall profitability, as measured by its annualized rate of return on average policyholders' surplus, which fell slightly to 13.1 percent in the first half, down from 13.5 percent for the same period in 2006.
In addition, net gains on underwriting fell 4.1 percent to $14.4 billion for the first half of 2007, compared with $15 billion in first-half 2006.
The industry's ultimate barometer–its combined ratio–also worsened during the period, rising from 92.0 in the first half of 2006 to 92.7 for the first half of this year, although to put that into perspective, insurers overall have rarely come in below 100 before the last couple of very profitable years.
The slight deterioration in underwriting results was characterized as the tip of the iceberg as competition increases.
"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.
PCI's chief economist, Genio Staranczak, 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 President Robert P. Hartwig said the results showed the industry's resiliency in the face of increased competition.
However, he warned that on its current cyclical path of softening prices, the industry's 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 it the commensurate surge in insurer impairments that invariably occur," Mr. Hartwig said.
He went on to cite indications that chief executives are managing their business in a way that could lead to a shallow market cycle. "Insurance CEOs 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 first half's anemic 0.1 percent premium gain "means that industry growth has come to a screeching halt and is, in fact, severely negative on an inflation-adjusted basis," according to Mr. Hartwig.
"The current slow-growth environment means that insurers face very difficult capital allocation decisions over the next several years," Mr. Hartwig added.
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