A.M. Best: Personal-Lines Insurers See Big Turnaround in 2012's First Half

Increasing rates and lower catastrophe losses led to a $6 billion favorable swing in net income for personal-lines insurers through the first six months of 2012 compared to the same period the year before, but economic and weather challenges remain for the segment, a recent analysis shows.

In a special report on the property and casualty industry, titled, “Lower Catastrophe Losses and Improving Rate Environment Increase P/C Net Income,” A.M. Best says the personal-lines segment reported after-tax net income of nearly $5.2 billion for 2012’s first half, compared to an after-tax net loss of $800 million for the first six months of 2011. 

Personal-lines insurers saw their collective operating income climb to $5.2 billion in the first half of this year from an operating loss of $2.6 billion in 2011, as underwriting losses fell to $2.7 billion compared to $11.1 billion.

The combined ratio for personal lines fell to 101.7 in the first half of this year compared to 109.4 last year. Much of the improvement is due to a notable drop in catastrophe losses compared to 2011 -- catastrophes added 7.3 points to the combined ratio for the first half of 2012 compared to 13.4 points in the first half of 2011. But even excluding cat losses, the combined ratio for 2012’s first half was 99.9 compared to 101.8 excluding cat losses for 2011’s first half. 

Net premiums earned increased by nearly $2.8 billion to $117.2 billion in 2012’s first half, while net written premiums increased by 3.8 percent to $119.9 billion. A.M. Best says the higher premium revenue was “due primarily to rate increases on homeowners and private passenger automobile liability lines. This has mainly been in response to the significant rise in property losses resulting from a trend of more frequent and severe weather-related claims over the past four years. It is also due to medical-cost inflation impacting private passenger automobile liability lines.”

Speaking to the results for personal-lines insurers in general, A.M. Best says, “Although six-month results showed improvement, the personal-lines segment’s performance continues to be impacted by severe weather across the country, weak economic conditions and low interest rates.” 

While cat losses were lower over the first six months of 2012 compared to 2011, the 2012 second-quarter was still active for weather-related losses. A.M. Best breaks down second-quarter catastrophe losses as a percentage of net premiums earned for 2005 to 2012. The data accounts for the entire property and casualty industry, excluding the mortgage and financial guaranty segments. A.M. Best says 2012 second-quarter cat losses amounted to 6 percent of net premiums earned, second among the years analyzed only to 2011, which saw second-quarter cat losses total 12.7 percent of net premiums earned.

Insurers are responding to the challenging conditions, A.M. Best notes. The ratings agency says, “Actions being taken by companies to improve underwriting performance include better exposure-management techniques, more sophisticated pricing algorithms and greater attention to risks that are more susceptible to other severe weather conditions–as opposed to just hurricane risk–such as tornado/hail storms and extremely hot and dry conditions that may lead to wildfires like those in Texas and other southern states in 2011, and in Colorado and Idaho during the summer of this year.”