Economic conditions giveth and economic conditions taketh away when it comes to property and casualty insurance industry profitability.
Although the recession was blamed for an increase in net underwriting losses for the industry during the first half of 2010, poor economic conditions might also have allowed property and casualty insurers to release reserves, which benefitted their overall bottom line, according to reports on industry-wide results from the Insurance Services Office, the Insurance Information Institute and the Property Casualty Insurers Association of America.
Net income for private p&c insurance companies in the United States more than doubled, increasing about $10.5 billion to $16.5 billion in the first half of 2010, compared with the same period a year ago.
Results were bolstered by a $13.3 billion increase in net investment gains (net investment income plus realized capital gains) for the first six months to $25.8 billion. This also allowed insurers to bolster policyholder surplus by 3.7 percent to $530.5 billion, compared with last year's half-way point.
On the negative side, the p&c insurance industry took an underwriting loss of $5.1 billion for the first six months of 2010, more than twice as high as the loss of $2.1 billion for first-half 2009. The industry's combined ratio as of June 30 rose to 101.7, compared to 100.8 a year ago.
However, ISO and PCI reported, "much of the $2.9 billion increase in net losses on underwriting to $5.1 billion in first-half 2010 reflects a decline in net earned premiums. Though net written premiums were essentially unchanged at $212.5 billion…net earned premiums fell $4 billion, or 1.9 percent, to $207.1 billion through six-months 2010…as a result of previous declines in written premiums."
"The absence of premium growth in first-half 2010 reflects the ongoing consequences of a once-in-a-lifetime economic storm," according to David Sampson, president and chief executive officer of PCI. "The weakness in the economy reduced demand for insurance and thereby contributed to continued softening in commercial insurance markets."
In addition, according to Michael R. Murray, assistant vice president for financial analysis at ISO, "the weakness in the economy may have also had a beneficial effect on claim frequency and claim severity.
He also speculated that "to the extent that loss experience has been better than insurers anticipated when they did their reserve analyses for year-end 2009, the weakness in the economy may have contributed to the reserve release that benefitted insurers' results for the first-half of 2010."
Excluding reserve releases, net losses on underwriting were $13.9 billion, up from $9.3 billion last year, and the combined ratio was 106, up from 104.2, added Mr. Murray.
Reserve releases increased $1.7 billion to $8.89 billion during the first half of this year compared with the same time in 2009.
Meanwhile, looking ahead, capacity remains near an all-time high, according to Robert P. Hartwig, president of the Insurance Information Institute.
"The bottom line is that the industry is extremely well-capitalized and financially prepared to pay very large-scale losses, if necessary," Mr. Hartwig noted in his first-half analysis.
However, Mr. Hartwig said insurers are earning "far less" than before the economic crisis. The industry's 7.5 percent rate of return is inadequate for many insurers and is about three points below the rate of return investors and insurers expect to earn for the risk they assume, he said.
The industry has not posted premium growth on an annual basis since 2006, but a 1.3 percent increase in second-quarter net written premiums broke a 12-quarter losing streak, Mr. Hartwig pointed out.
He predicted that insurers will look to earn more via higher rates because their investment portfolios are earning less than in the past. "Buyers and regulators will need to accept the fact that insurers will need to charge higher rates in order to meet expected losses that are little changed despite the weak economy and depressed investment environment," according to Mr. Hartwig.
A major hurricane in Florida is going to cost the same, if not more, than the same storm before the financial crisis, Mr. Hartwig pointed out.
For the second quarter, the industry's consolidated net income after taxes rose 6.3 percent to $7.6 billion, up $400 million.
However, the industry's annualized rate of return on average surplus dropped to 5.7 percent in second-quarter 2010 from 6.4 percent a year earlier "because the growth in income failed to keep pace with the growth in average surplus," the groups explained.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.